The impact of financial leverage on return on equity and earnings per share Consider the following case of free Spirit Industries Inci: Suppose Free Spirit Industries Inc. is considering a project that will require $250,000 in assets. - The company is small, so it is exempt from the interest deduction fimitation under the new tax law. - 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 25%. If the project is financed using 100% equity capital, then Free Spirit industries inc, s return on equity (ROE) on the project will be In addition, Free Spirit's earnings per share (EPS) will be Aternatively, Free Spirit Industries Incis cro is also considering finanding the project with 50% debt and 50% equity capital . The interest rate on the compary's debt will be 10%, Because the company will firance colv 50% of the project with equity, it will have only 12,500 shares outstanding. Free Spirit industries incis ROF and the company's EPs will ben f management decides to finance the profect with 50% debt and 50% equity. Typically, using financial leverage will projects ropected ROE