The impact of financial leverage on return on equity and earnings per share Cons

Question

The impact of financial leverage on return on equity and earnings per share Consider this case: Suppose Khoshjamal Corporation is considering a project that will require $400,000 in assets. The project is expected to produce an EBIT (earnings before interest and taxes) of $55,000 · The project will be financed with 100% equity Common equity outstanding will be 20,000 shares. · The company faces a tax rate of 30%. Using the preceding information, what will Khoshjamal Corporation's return on equity (ROE) be for this project? 11.07% o 8.67% o 9.63% 0 10.59% Khoshjamal Corporation's earnings per share (EPS) will be if it finances this project with 100% equity $1.54 $2.03 $1.93 $1.64 $1.45

Explanation / Answer

Answer to Part I of the question

Formula for return o Equity (ROE) = Net income / Shareholders Equity

Answer to Part II of the question with debt @50%

Part III of the question : EPS @50% of Debt

EBIT 55000 Tax Rate 30% 16500 Net Income 38500 Shareholders' Equity 400000 ROE 9.63%

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