The impact of financial leverage on return on equity and earnings per share Consider the following case of Happy Turtle Transportation Company: Suppose Happy Turtle Transportation Company is considering a project that will require $350,000 in assets. The project is expected to produce earnings before interest and taxes (EBIT) of $40,000. Common equity outstanding will be 10,000 shares. The company incurs a tax rate of 35%. . In addition, Happy If the project is financed using 100% equity capital, then Happy Turtle's return on equity (ROE) on the project will be Turtle's earnings per share (EPS) will be . In addition, Happy If the project is financed using 100% equity capital, then Happy Turtle's return on equity (ROE) on the project will be Turtle's earnings per share (EPS) will be 8.17% Alternatively, Happy Turtle Transportation Company's CFO is also considering financing the project with 50% debt and 7,06% ity 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 5,000 shares 7.43% outstanding. Happy Turtle Transportation Company's ROE and the company's EPS will be management decides to finance the project with 50% debt and 50% equity. 8.92% The project is expected to prod $2.21 ings before interest and taxes (EBIT) of $40,000. Common equity outstanding wil 000 shares. $2.60 The company incurs a tax rate $1.95 $2.86 $2.47 tal, then Happy Turtle's return on equity (ROE) on the project will be . In addition, Happy If the project is financed using 100% eq Turtle's earnings per share (EPS) will be In addition, Happy If the project is financed using 100% equity capital, then Happy Turtle's return on equity (ROE) on the project will be Turtle's earnings per share (EPS) will be Alternatively, Happy Turtle Transportation Company'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 5,000 shares outstanding. Happy Turtle Transportation Company'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 8.12 and $2.72, respectively If the project is financed using 100% equity capital, then Happy Turtle's return on equity In addition, Happy 7.06 and $2.47, respectively Turtle's earnings per share (EPS) will be 7.41 and $2.35, respectively Alternatively, Happy Turtle Transportation Company's CFO is also considering financing th 0% equity capital. The interest 8.82 and $2.96, respectively rate on the company's debt will be 12%. Because the company will finance only 50% of t ve only 5,000 shares outstanding. Happy Turtle Transportation Company's ROE and the company's EPS will be if management decides to finance the project with 50% debt and 50% equity. 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 5,000 shares outstanding. Happy Turtle Transportation Company's ROE and the company's EPS will be increase if management decides to finance the project with 50% debt and 50% equity. decrease When a firm uses debt financing, the business risk exposure for the firm's common shareholders will
