Consider the following case of Free Spirit Industries Inc.: Suppose Free Spirit Industries Inc. is considering a project that will require $350,000 in assets. The project is expected to produce earnings before interest and taxes (EBIT) of $45,000. 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 Free Spirit Industries Inc.s return on equity (ROE) on the project will be . In addition, Free Spirits earnings per share (EPS) will be . Alternatively, Free Spirit Industries Inc.s CFO is also considering financing the project with 50% debt and 50% equity capital. The interest rate on the companys debt will be 10%. Because the company will finance only 50% of the project with equity, it will have only 12,500 shares outstanding. Free Spirit Industries Inc.s ROE and the companys EPS will be if management decides to finance the project with 50% debt and 50% equity. Typically, using financial leverage will ... a projects expected ROE

The impact of financial leverage on return on equity and carnisg per share Consider the following case of Free Spirt Ind ustries Inc: Suppose Free Spinit Industries Inc, is considering a project that will require 5350,30 in assets. - The project is expected to produce earnings before interest and taxes (EBIT) of t45,000. - Common equity outstanding will be 25,000 shares. - The compacty incurs a tax rate of 35 wi. If the project is financed using 100% equity capital, then Free 5pint Industres Incis retum on equit (Rof) on the project will be addition, Free spirit's earnings per share (6ps) will be Aiternatively, Free Spint Industries Inci's CFO is also considenng financing the project with 50% debe and 50% equity capital. The interest rate on the compary's debe will be 10\%. Because the compamy will finwnee onlv 50% of the project with equity, it will have only 12.500 shares sutstand rng. Fre4 Spint industries Insis ROE and the compary's EPS Will be if management deodes to finance the biruject mith 505 debe and 50% equity. Typicallv, using financial leverage will 3 project's expected ROE