Consider the following case of Lost Pigeon Aviation:

Suppose Lost Pigeon Aviation is considering a project that will require $350,000 in assets.

	The project is expected to produce earnings before interest and taxes (EBIT) of $60,000.
	Common equity outstanding will be 15,000 shares.
	The company incurs a tax rate of 40%.

If the project is financed using 100% equity capital, then Lost Pigeon Aviations return on equity (ROE) on the project will be10.29% . In addition, Lost Pigeons earnings per share (EPS) will be $

Alternatively, Lost Pigeon Aviations CFO is also considering financing the project with 50% debt and 50% equity capital. The interest rate on the companys debt will be 11%. Because the company will finance only 50% of the project with equity, it will have only 7,500 shares outstanding. Lost Pigeon Aviations ROE and the companys EPS will be ? if management decides to finance the project with 50% debt and 50% equity.

When a firm uses debt financing, the business risk exposure for the firms common shareholders will increase/ decrease