Companies that use debt in their capital structure are said to be using financial leverage. Using leverage can increase shareholder returns, but

leverage also increases the risk that shareholders bear.

Consider the following case:

Newtown Propane is a small company and is considering a project that will require $$500,000$ in assets. The project will be financed with $100\%$ equity.

The company faces a tax rate of $25\%.$ What will be the ROE $($return on equity$)$ for this project if it produces an EBIT $($earnings before interest and

taxes$)$ of $$140,000?$

$14\mathrm{.}70\%$

$17\mathrm{.}85\%$

$21\mathrm{.}00\%$

$13\mathrm{.}65\%$

a large, positive income this year.

$-5\mathrm{.}10\%$

$-6\mathrm{.}0\%$

$-5\mathrm{.}40\%$

$-6\mathrm{.}60\%$