Assignment 13- Capital Structure and Leverage 3. The effect of financial leverage on ROE Aa Aa Compenies that use debt in their capital structure are said to be using financial leverage. Using leverage can increase captal structure are sale to be using firancdat everage Jsing leverage can inerese shareholder returns, but leverage also increeses the risk that shareholders bear Consider the following case Osato Chemsicals Inc. is considering e project that will require $600,000 in assets. The project wil be franced with 100% equity. The oompany faces-tax rate of 35% whirt will be the ROE (return on equity) for this project if it produces an EBIT (earmings before interest and taxes) of $160,0007 17.3% o 19.0% o 12.1% o 18.2% Determine what the project's ROE will be if its EBIT is-$60,000. When calculating the tax effects, assume that Osato Chemicals Inc as a whole wil have a large, positive income this year -5.2% -6,8% 0-65% Osato Chemicals Inc. is also considering financing the project with SO% equity and 50% debt The interest rate on the company's debt will be 10%, what will be the project's ROE if itproduces an EerT of S160,000? 24 0% o 26 896 28,2% o 32.4% what will be the project's ROE if it produces an EBIT of-s60,000 and it finances 50%of the project with equity and 50% nith debt? when calculating the tax effects, positive income this year. assume that Osato Chemicals Inc. as a whole will have a large, Q-25.4% 0-195% -20.5% 0-23.4% Smith and T Co. currently is financed with 10% delt and 90% equity issus new long-term debt and However, its CFO has proposed that the fim repurchase some of the firm's common stock. Its advisers believe that the long-term debt would require before-tax yield income and total assets will not be affected. The CFO has told the rest of the management team that ha beleves this move will inoresse the fiom's stock price. If Smith and T Co procesds with the recapitalization, of 10%, while the finn's basic earning power is 14%. The finn's operating items are also likely to incresse? Check all that apply D Basic eoming power (BEP) D Raturn on assets (ROA) Cost of debt (ra) W Net income Cost of equity (n)