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Consider the following case of Lost Pigeon Aviation: Suppose Lost Pigeon Aviation is considering a project that will require $ 4 0 0 , 0
Consider the following case of Lost Pigeon Aviation:
Suppose Lost Pigeon Aviation is considering a project that will require $ 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 $
Common equity outstanding will be shares.
The company incurs a tax rate of
If the project is financed using equity capital, then Lost Pigeon Aviations return on equity ROE on the project will be In addition, Lost Pigeons earnings per share EPS will be
Alternatively, Lost Pigeon Aviations CFO is also considering financing the project with debt and equity capital. The interest rate on the companys debt will be Because the company will finance only of the project with equity, it will have only shares outstanding. Lost Pigeon Aviations ROE and the companys EPS will be if management decides to finance the project with debt and equity.
When a firm uses debt financing, the business risk exposure for the firms common shareholders will
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