5. Business and financial risk The impact of financial leverage on return on equity and earnings per share Consider the following case of Happy Turtle Transportation Company: Suppose Happy Turtle Transportation Company is considering a project that will require $400,000 in assets. - The project is expected to produce earnings before interest and taxes (EBIT) of $55,000. - Common equity outstanding will be 20,000 shares. - The company incurs a tax rate of 35%. If the project is financed using 100% equity capital, then Happy Turtle's return on equity (ROE) on the project will be Happy Turtie's earnings per share (EPS) will be Aitematively, Happy Turtle Transportation Company's CFO is also considering finaning the project with 50% debt and 50% equity capital. The interest rate on the company's debt will be 13%. Because the company will finance only 50% of the project with equity, it will have only 10 , 000 shares outstanding. Mappy Turtie Transportation Company's ROE and the company's Eps will be to finance the project with 50% debt and 50% equity. When a firm uses debt financing, the business risk exposure for the firm's common shareholders will