Consider the following case of Green Rabbit Transportation Inc.:

Suppose Green Rabbit Transportation Inc. is considering a project that will require $$350,000$ in assets.

The company is small, so it is exempt from the interest deduction limitation under the new tax law.

The project is expected to produce earnings before interest and taxes $($EBIT$)$ of $$45,000.$

Common equity outstanding will be $20,000$ shares.

The company incurs a tax rate of $25\%.$

$12\mathrm{.}97\%$ and $$2\mathrm{.}16,$ respectively

If the project is financed using $100\%$ equity capital, then Green Rabbit Transportatic

bin,. In addition, Green Rabbit's earnings per share $($EPS$)$ will be $$1\mathrm{.}6$

$11\mathrm{.}79\%$ and $$2\mathrm{.}06,$ respectively

the project will

$14\mathrm{.}74\%$ and $$2\mathrm{.}47,$ respectively

Alternatively, Green Rabbit Transportation Inc.$\text{'}$s CFO is also considering financing th

on the company's debt will be $10\%.$ Because the company will finance only $50\%$ of $t$

$11\mathrm{.}20\%$ and $$1\mathrm{.}85,$ respectively

equity capital. The interest rate

only $10,000$ shares

outstanding. Green Rabbit Transportation Inc.$\text{'}$s ROE and the company's EPS will be

if management decides

to finance the project with $50\%$ debt and $50\%$ equity.

Typically, using financial leverage will

a project's expected ROE.