< Back to Assignment Attempts: Average: /3 2. 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 project is expected to produce earnings before interest and taxes (EBIT) of $45.000. Common equity outstanding will be 20,000 shares. The company incurs a tax rate of 30%. 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 In Alternatively. Loat 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 13%. 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 management decides 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 Grade It Now Save & Continue Continue without saving