Suppose Free Spirit Industries Inc. is considering a project that will require $300,000 in assets. The company is small, so it is exempt from the interest deduction limitation under the new tax law. The project is expected to produce earrings before interest and taxes (EBIT) of $60,000. Common equity outstanding will be 20,000 shares The company incurs a tax rate of 25%. . In 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 Alternatively, Free Spirit Industries Inc.'s CFO is also considering financing the project with 50% debt and 50% equity capital. The interest rate on the company's debt will be 13%. Because the company will finance only 50% of the project with equity, it will have only 10,000 shares outstanding, 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. When a firm uses debt financing, the business risk exposure for the firm's common shareholders will increase Suppose Free Spirit Industries Inc. is considering a project that will require $300,000 in assets. The company is small, so it is exempt from the interest deduction limitation under the new tax law. . The project is expected to produce earnings before interest and taxes (EBIT) of $60,000 Common equity outstanding will be 20,000 shares. The company incurs a tax rate of 25%. If the project is financed using 100% equity capital, then Free Spirit Industries Inc.'s return on equity (ROE) on the project will be In addition, Free Spirit's earnings per share (EPS) will be 17.25% Alternatively, Free Spirit Industries Inc.'s CFO is also considering financing the project with 50% debt and 50% equity capital. The 15.75 on the company's debt will be 13%. Because the company will finance only 50% of the project with equity, it will have only 10,000 share po. Free Spirit Industries Inc.'s ROE and the company's EPS will be 15.00 If management decides to fina Vect with 50% debt and 50% equity. 13.50 dat financing the business risk exposure for the firm's common shareholders will increase Suppose Free Spirit Industries Inc. is considering a project that will require $300,000 in assets. The company is small, so it is exempt from the interest deduction limitation under the new tax law. The project is expected to produce earnings $2.36 ferest and taxes (EBIT) of $60,000. . Common equity outstanding will be 20,000 SH The company incurs a tax rate of 25%. $2.03 $2.25 $1.80 In $1.91 If the project is financed using 100% equity capital, th Spirit Industries Inc.'s return on equity (ROE) on the project will be addition, Free Spirit's earnings per share (EPS) will be Alternatively, Free Spirit Industries Inc.'s CFO is also considering financing the project with 50% debt and 50% equity capital. The Interest rate on the company's debt will be 13%. Because the company will finance only 50% of the project with equity, it will have only 10,000 shares outstanding. 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. 20.25% and $3.04, respectively If the project is financed using 100% equity capital, then In equity (ROE) on the project will be In 24,30% and $3.50, respectively addition, Free Spirit's earnings per share (EPS) will be 22.28% and $3.19, respectively Alternatively, Free Spirit Industries Inc.'s CFO is also consi $% debt and 50% equity capital. The interest rate on the 19.24% and $2.74, respectively company's debt will be 13%. Because the company will find equity, it will have only 10,000 shares outstanding, 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 When a firm uses debt financing, the business risk exposure for the firm's common shareholders will increase
