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Suppose Purple Panda Importers is considering a project that will require $250,000 in assets. - The project is expected to produce earnings before interest and
Suppose Purple Panda Importers is considering a project that will require $250,000 in assets. - The project is expected to produce earnings before interest and taxes (EBIT) of $45,000. - Common equity outstanding will be 25,000 shares. - The company incurs a tax rate of 35%. If the project is financed using 100% equity capital, then Purple Panda Importers's return on equity (ROE) on the project will be . In addition, Purple Panda's earnings per share (EPS) will be Alternatively, Purple Panda Importers'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 12%. Because the company will finance only 50% of the project with equity, it will have only 12,500 shares outstanding. Purple Panda Importers's ROE and the company's EPS will be 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 the interest rate charged
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