Drop Downs

Suppose Free Spirit Industries Inc. is considering a project that will require $400,000 in assets. - The project is expected to produce earnings before interest and taxes (EBIT) of $40,000. - Common equity outstanding will be 10,000 shares. - The company incurs a tax rate of 40%. If the project is financed using 100% equity capital, then Free Spirit Industries Inc.'s return on equity (ROE) on the project will be addition, Free Spirit's earnings per share (EPS) will be company's debt will be 11%. Because the company will finance only 50% of the project with equity, it will have only 5 , Free Spirit Industries Inc.'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. \begin{tabular}{l} 6.00% \\ \hline 4.80% \\ \hline 6.90% \\ \hline 7.20% \end{tabular} $2.40 $2.64 $2.52 $1.92 $1.68 6.75% and $2.59, respectively 6.48% and $2.48, respectively 5.40% and $2.16, respectively 4.05% and $1.73, respectively decrease