Blank space answers:

1) 13.65% / 11.7% / 12.35% / 13%

2) $0.83/ $1.04/ $0.94/ $0.78/ $0.88

3) 19.11 & $1.39 / 20.02 & $1.53 / 17.29 & $1.31 / 18.20 & $1.46

4) increase / decrease

Consider the following case of Lost Pigeon Aviation: Suppose Lost Pigeon Aviation is considering a project that will require $200,000 in assets. The project is expected to produce earnings before interest and taxes (EBIT) of $40,000. Common equity outstanding will be 25,000 shares. The company incurs a tax rate of 35%. If the project is financed using 100% equity capital, then Lost Pigeon's return on equity (ROE) on the project will be . In addition, Lost Pigeon's earnings per share (EPS) will 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 12%. Because the company will finance only 50% of the project with equity, it will have only 12,500 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. When a firm uses debt financing, the business risk exposure for the firm's common shareholders will