Business, 13.03.2020 01:57 celeste2627

Consider the following case of Lost Pigeon Aviation:

Suppose Lost Pigeon Aviation is considering a project that will require $350,000 in assets.
• The project is expected to produce earnings before interest and taxes (EBIT) of $55,000.
• Common equity outstanding will be 25,000 shares.
• The company incurs a tax rate of 35%.

If the project is financed using 100% equity capital, then Lost Pigeon’s return on equity (ROE) on the project will be . In addition, Lost Pigeon’s earnings per share (EPS) will be .

Alternatively, Lost Pigeon Aviation’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 10%. Because the company will finance only 50% of the project with equity, it will have only 12,500 shares outstanding. Lost Pigeon Aviation’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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Consider the following case of Lost Pigeon Aviation:

Suppose Lost Pigeon Aviation is co...

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