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 $250,000 in assets. The project is expected to produce earnings before interest and taxes (EBIT) of $40,000. . Common equity outstanding will be 10,000 shares. The company incurs a tax rate of 30%. If the project is financed using 100% equity capital, then Free Spirit Industries Inc.'s return on equity (ROE) on the project will . In addition, Free Spirit's earnings per share (EPS) will be 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 5,000 shares outstanding. Free Spirit Industries Inc.'s ROE and the company's EPS will be management decides to finance the project with 50% debt and 50% equity. if When a firm uses debt financing, the business risk exposure for the firm's common shareholders will