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1. Business and financial risk The impact of financial leverage on return on equity and earnings per share Consider the following case of Lost Pigeon Aviation: Suppose Lost Pigeon Aviation is considering a project that will require $250,000 in assets. The company is small, so it is exempt from the interest deduction limitation under the new tax law. The project is expected to produce earnings before interest and taxes (EBIT) of $60,000. Common equity outstanding will be 20,000 shares. The company incurs a tax rate of 25%. . In If the project is financed using 100% equity capital, then Lost Pigeon Aviation's return on equity (ROE) on the project will be addition, Lost Pigeon's earnings per share (EPS) will be . Alternatively, Lost Pigeon Aviation's CFO is also considering financing the project with 50% debt and 50% equity capital. The interest rate on the company's debt will be 10%. Because the company will finance only 50% of the project with equity, it will have only 10,000 shares outstanding. Lost Pigeon Aviation's ROE and the company's EPS will be if management decides to finance the project with 50% debt and 50% equity. Typically, using financial leverage will a project's expected ROE. 27.08% and $3.20, respectively 28.50% and $3.56, respectively 35.63% and $4.27, respectively 29.93% and $3.38, respectively