The impact of financial leverage on return on equity and earnings per share Consider the...
60.1K
Verified Solution
Link Copied!
Question
Finance
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 $400,000 in assets.
The project is expected to produce earnings before interest and taxes (EBIT) of $45,000.
Common equity outstanding will be 10,000 shares.
The company incurs a tax rate of 40%.
If the project is financed using 100% equity capital, then Purple Pandas return on equity (ROE) on the project will be . In addition, Purple Pandas earnings per share (EPS) will be .
Alternatively, Purple Panda Importerss CFO is also considering financing the project with 50% debt and 50% equity capital. The interest rate on the companys debt will be 12%. Because the company will finance only 50% of the project with equity, it will have only 5,000 shares outstanding. Purple Panda Importerss ROE and the companys EPS will be if management decides to finance the project with 50% debt and 50% equity.
Typically, using financial leverage will a projects expected ROE.
Answer & Explanation
Solved by verified expert
Get Answers to Unlimited Questions
Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!
Membership Benefits:
Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
