the tax rate is 40%

Purple Whale Foodstuffs Inc. is considering implementing a project that is identical to that being evaluated by Chilly Moose-although Purple Whale wants to finance the $550,000.00 in additional assets using 50% equity and 50% debt capital. The interest rate on Purple Whale's new debt is expected to be 11%, and the project is forecasted to generate an EBIT of $160,000. As a result, the project is expected to generate a ROE of Now assume that Purple Whale finances the same project with 50% debt and 50% equity capital, but expects it to generate an EBIT of only $45,000. Further assume that the company as a whole will generate a large, positive income this year, such that any loss generated by the project (with its resulting tax saving) will be offset by the company's other positive) income. Remember, the interest rate on Purple Whale's debt is 11%. Under these conditions, it is reasonable to expect that Purple Whale will generate a ROE of: 3.68% O 3.849 O 3.26% O 3.36%