Suppose Green Rabbit Transportation 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 $60,000.
	Common equity outstanding will be 15,000 shares.
	The company incurs a tax rate of 30%.

If the project is financed using 100% equity capital, then Green Rabbits return on equity (ROE) on the project will be

• 12.60%
• 8.92%
• 9.45%
• 10.50%

. In addition, Green Rabbits earnings per share (EPS) will be

• $2.24
• $3.08
• $2.52
• $2.10
• $2.80 .

Alternatively, Green Rabbit Transportation Inc.s CFO is also considering financing the project with 50% debt and 50% equity capital. The interest rate on the companys debt will be 11%. Because the company will finance only 50% of the project with equity, it will have only 7,500 shares outstanding. Green Rabbit Transportation Inc.s ROE and the companys EPS will be

• 11.31 and $3.02, respectively
• 13.30 and $3.55, respectively
• 12.64 and $3.20, respectively
• 16.63 and $4.26, respectively if 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

• decrease
• increase the interest rate charged.