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

Consider the following case of Free Spirit Industries Inc.:

Suppose Free Spirit Industries Inc. is considering a project that will require $$300,000$ in assets.

$$ The project is expected to produce earnings before interest and taxes $($EBIT$)$ of $$50,000.$

$$ Common equity outstanding will be $20,000$ shares.

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

If the project is financed using $100\%$ equity capital, then Free Spirit$$s return on equity $($ROE$)$ on the project will be $.$ In addition, Free Spirit$$s earnings per share $($EPS$)$ will be $.$

Alternatively, Free Spirit Industries Inc.$$s CFO is also considering financing the project with $50\%$ debt and $50\%$ equity capital. The interest rate on the company$$s debt will be $13\%.$ Because the company will finance only $50\%$ of the project with equity, it will have only $10,000$ shares outstanding. Free Spirit Industries Inc.$$s ROE and the company$$s EPS will be if management decides to finance the project with $50\%$ debt and $50\%$ equity.

Typically, using financial leverage will a project$$s expected ROE.