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  3. the impact of financial leverage on return on equi

The impact of financial leverage on return on equity and earnings per share Consider the...

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The impact of financial leverage on return on equity and earnings per share Consider the following case of Purple Panda Importers: Suppose Purple Panda Importers is considering a project that will require $350,000 in assets The project is expected to produce earnings before interest and taxes (EBIT) of $50,000. 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 Purple Panda Importers' return on equity (ROE) on the project will be _____. In addition, Purple Panda's earnings per share (EPS) will be _____. Alternatively, Purple Panda Importers 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 7, 500 shares outstanding. Purple Panda Importer's ROE and the company's EPS will be _____ if management decides to finance the project with 50% debt and 50% equity When a firm uses debt financing, the business risk exposure for the firm's common shareholders will _____

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