Newtown Propane is a small company and is considering a project that will require $$550,000$ in assets. The project will be financed with $100\%$ equity. The company faces a tax rate of $25\%.$ What will be the ROE $($return on equity$)$ for this project if it produces an EBIT $($earnings before interest and taxes$)$ of $$145,000?$

$20\mathrm{.}76\%$

$15\mathrm{.}82\%$

$11\mathrm{.}86\%$

$19\mathrm{.}77\%$

Determine what the project's ROE will be if its EBIT is $-$$$55,000.$ When calculating the tax effects, assume that Newtown Propane as a whole will have a large, positive income this year.

$-6\mathrm{.}00\%$

$-7\mathrm{.}87\%$

$-8\mathrm{.}62\%$

$-7\mathrm{.}5\%$

Newtown Propane is also considering financing the project with $50\%$ equity and $50\%$ debt. The interest rate on the company's debt will be $10\%.$ What will be the project's ROE if it produces an EBIT of $$145,000?$

$22\mathrm{.}43\%$

$33\mathrm{.}65\%$

$30\mathrm{.}45\%$

$32\mathrm{.}05\%$

What will be the project's ROE if it produces an EBIT of $-$$$55,000$ and it finances $50\%$ of the project with equity and $50\%$ with debt? When calculating the tax effects, assume that Newtown Propane as a whole will have a large, positive income this year.

$-20\mathrm{.}25\%$

$-25\mathrm{.}87\%$

$-22\mathrm{.}50\%$

$-28\mathrm{.}12\%$

The use of financial leverage $$ the expected ROE, $$ the probability of a large loss, and consequently $$ the risk borne by stockholders. The greater the firm's chance of bankruptcy, the $$ its optimal debt ratio will be$.$ manager is more likely to use debt in an effort to boost profits.