The impact of financial leverage on return on equity and earnings per share onsider 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 $55,000. Common equity outstanding will be 30,000 shares. * The company incurs a tax rate of 30%. If the project is financed using 100% equity capital, then Purple Panda Importers's return on equity (ROE) on the project will be 19.25% . In addition, Purple Panda's earnings per share (EPS) will be $1.28 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 15,000 shares outstanding. Purple Panda Importers's ROE and the company's EPS will be 50% equity if management decides to finance the project with 50% debt and the interest rate charged. As a firm uses more debt in its capital structure, lenders will usually MAC 27,0,0,130 3 3341 2004-20L6 Aple A Grade It Now Save & Continue MacBook Air