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Consider the following case of Purple Panda Importers: Suppose Purple Panda Importers is considering a project that will require $350,000 in assets. The project is
Consider the following case of Purple Panda Importers: Suppose Purple Panda Importers is considering a project that will require $350,000 in assets. The project is expected to produce earnings before interest and taxes (EBIT) of $50,000. Common equity outstanding will be 15,000 shares. . The company incurs a tax rate of 35%. If the project is financed using 100% equity capital, then Purple Panda Importers's return on equity (ROE) on the project will be 9.29% . In addition, Purple Panda's earnings per share (EPS) will be $2.17 Alternatively, Purple Panda Importers's CFO is also considering financing the project with S0% debt and 50% equity capital. The interest rate on the company's debt will be 11%. Because the company will finance only 50% of the project with equity, it will have only 7,500 shares outstanding. Purple Panda Importers's ROE and the company's EPS will be equity. 14.28%and $3.20, respectively if management decides to finance the project with 50% debt and 50% 10.85%and $2.40, respectively 12.56%and $2.80, respectively 11.42% and$2.67, respectively Typically, using Tinanciar teverage Wi a project's expected ROE
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