The impact of financial leverage on return on equity and earnings per share

Consider the following case of Purple Panda Importers:

Suppose Purple Panda Importers is considering a project that will require $$200,000$ in assets.

$$ The project is expected to produce earnings before interest and taxes $($EBIT$)$ of $$60,000.$

$$ Common equity outstanding will be $30,000$ shares.

$$ The company incurs a tax rate of $40\%.$

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 $13\%.$ Because the company will finance only $50\%$ of the project with equity, it will have only $15,000$ 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.

When a firm uses debt financing, the business risk exposure for the firm$$s common shareholders will INCREASE $/$ DECREASE.