Soppose Free 5 pinit Industriec the is consldering a project that wili require $300,000 in askets. - The project is expected to produce eurnings before interest and taxen (EBt) of 545,000. - Commen equtr outstarding will be 30.000 shares. - The company incurs a tax cate of 30 w. If the project is financed using 1004 s equity captal, then free spints return en equity (ace) on the projekt will be In asstion, Free Sperits eamings per share (DPS) wit be management decldes to finance the preject with sow debt and sow equity As a firm uses more debt in nu coptal struture, lenders wit unatly the interest rate charged. en Free Spirit's return on equity (ROE) on the project will be In addition, nsidering financing the project with 50% debt and 50% equi he interest rate have only 15,000 shares outstanding. Free Spirit Industries I id the company's debt and 50% equity. s will usually the interest rate charged. 5. Business and financial risk The impact of financial leverage on return on equity and earnings pe Consider the following case of Free Spirit Industries Inc.: Sunnnge Free Spirit Industries Inc. is considering a project that will requ he project is expected to produce earnings before interest and ta> ommon equity outstanding will be 30,000 shares. he company incurs a tax rate of 30%. Alternatively, Free Spirit Industries Inc.'s CFO is also considering financing th will finance only 50% of the project with equity, it will have only 15,000 shat management decides to finance the project with 50% debt and 50% equity. As a firm uses more debt in its capital structure, lenders will usually BIT) of $45,000. uity (ROE) on the project will be In addition, Free Spirit's ect with 50% debt and 50% equity capital. The interest rate on the compi standing. Free Spirit Industries Inci's ROE and the company's EPS will be 5. Business and financial risk The impact of financlal leverage on return on equity and earnings per share Consider the following case of Free Spirit Industries Inc.: Suppose Free Spirit Industries Inc. is considering a project that will require $300,000 in assets. - The project is expected to produce earnings before interest and taxes (EBIT) of $45,000. - Common equity outstanding will be 30,000 shares: - The company incurs a tax rate of 30%. If the project is financed using 100% equity copital, then Free Spirit's return on equity (ROE) on the project will be In addition, F Aternatively, Free 5 pirit Industries Inci's CFO is also considering fini ject with 50% debt and 50% equity copital. The interest rate on will finance only 50% of the project with equity, it will have only 15 , itstanding. Free Spirit Industries Inci's ROE and the company's EF management decides to finance the project with 50% debt and 50% As a firm uses more debt in its capital structure, lenders will usually the interest rate charged
