The impact of financial leverage on return on equity and earnings per share Consider the following case of Lost Pigeon Aviation: Suppose Lost Pigeon Aviation is considering a project that will require $200,000 in assets, - The project is expected to produce earnings before interest and taxes (EBI) of 550,000 . - Common equity outstanding will be 15,000 shares. - The company incurs a tax rate of 35%. If the project is financed using 100% equity capital, then Lost Pigeon's return on equity (ROE) on the project will be 1n addition. Lost Pigeon's earnings per share (EPS) will be Atternatively, Lost Pigeon Aviation's CFO is also considering financing the project with so4, debe and so\% equity capical, The interest rate on the company's debt will be 114h. Because the corgpary will finance only so\% of the prosect with equiry, it will have only 7 soo ahares outstanding. Lost Pigeon Aviation's ROE and the company' EPS will be i managernented des to finance the project with 5046 debt and 50% equity. As a firm uses more debt in its capital structure, lenders will usually the interest rase charged