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:

Sombra Corp. is a small company and is considering a project that will require $$700,000$ in assets. The project will be financed with $100\%$ equity. The company faces a tax rate of $25\%.$ What will be the ROE $($return on equity$)$ for this project if it produces an EBIT $($earnings before interest and taxes$)$ of $$155,000?$

$10\mathrm{.}80\%$

$16\mathrm{.}61\%$

$17\mathrm{.}44\%$

$11\mathrm{.}63\%$

Determine what the project's ROE will be if its EBIT is $-$$$60,000.$ When calculating the tax effects, assume that Sombra Corp. as a whole will have a large, positive income this year.

$-5\mathrm{.}76\%$

$-7\mathrm{.}36\%$

$-6\mathrm{.}4\%$

$-5\mathrm{.}44\%$