Companies that use debt in their capital structure are said to be using finandal leverage. Using leverage can increase sharehoider roturns, but? leverage also increases the risk that shareholders bear. Consider the following case: Chilly Moose Fruit Producer is considering a project that will require $700,000 in assets. The project will be financed with 100% equity. The company faces a tax rate of 40%. Assumino that the profect generates an expected EBIT (earnings before interest and taxes) of $170,000, then Chilly Moose's antidpated RoF (return on equity) for the project will be: 9.47% 1530% 14.57% 10.93% In contrast, assume that the project's EBIT is only $50,000. When calculating the tax effects, assume that the entire Chilly Moose Fruit in oducer will earn a large, positive income this yeaf, The resulting RoE will bes Now consider the case of the Black Sheep Broadcasting Company: Black Shere Broadcasting Company is considering implementing a project that is identical to that being evaluated by Chilly Moose-although Black Sheep wants to finance the 5700,000.00 in additional assets using 50% equity and 50% debt capital. The interest rate on Black shee's new debt is expected to be 15\%5, and the project is forecasted to generate an EBT of $170,000. As a result, the project is expected to generate a RoE of Now assume that Black Sheep finances the same project with 50% debt and 50% equity capital, but expects it to generate an EilI of only $50,000. Further assume that the company as a whole will generate a large, nositive income this year, such that any loss generated by the project (with its resulting tax saving) will be offset by the company's other (positive) income. Romembor, the interest rate on Biadk Sheep's debt is 15%. Under these conditions, it is reasonable to expect that Black Sheep will generate a ROE of: 0,3876 30.486 0.50% 0.4414