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Companies that use debt in their capital structure are said to be using financial leverage. Using leverage can increase shareholder returns, but leverage also increases the risk that shareholders bear: Consider the following case: Mammoth Pictures Inc, is a small company and is considering a project that will require $550,000 in assets. The project will be financed with 100% equity. The company faces a tax rate of 25%. What will be the Roe (return on equity) for this project if it produces an EaIT (earnings before interest and taxes) of $150,000 ? 15.34% 20.45% 13.29% 12.27% Determine what the project's ROE wili be if its EBrT is $40,000. When calculating the tax effects, assume that Mammoth Pictures Inc, as a whole will have a large, positive income this year. 4.32% 4.59% 5.13% 5.4% Mammoth Pictures Inc. is also considering financing the project with 50% equity and 50% debt. The interest rate on the company's debt will be 13%. What will be the project's ROE if it produces an EBrT of $150,000 ? 21.81% 23.37% 31.16% 26.49% What will be the project's ROE if it produces an EBIT of $40,000 and it finances 50% of the project with equity and 50% with debt? When calculating the tax effects, assume that Mammoth Pictures Inc. as a whole will have a large, positive income this year. 18.59% 20.66% 19.63% 22.73% The use of financial leverage the expected ROE, the probability of a large loss, and consequently the risk borne by stockholders. The greater the firm's chance of bankruptcy, the its optimal debt ratio will be. manager: is more likely to use debt in an effort to boost profits

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