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Unformatted text preview: of $250,000 of 16% (annual interest) debt and 2,000
shares of common stock. The firm pays taxes at the rate of 40%.
a. Using EBIT values of $80,000 and $120,000, determine the associated earnings per share (EPS).
b. Using $80,000 of EBIT as a base, calculate the degree of financial leverage
c. Rework parts a and b assuming that the firm has $100,000 of 16% (annual
interest) debt and 3,000 shares of common stock. LG2 LG5 12–12 DFL and graphical display of financing plans Wells and Associates has EBIT of
$67,500. Interest costs are $22,500, and the firm has 15,000 shares of common
stock outstanding. Assume a 40% tax rate.
a. Use the degree of financial leverage (DFL) formula to calculate the DFL for
b. Using a set of EBIT–EPS axes, plot Wells and Associates’ financing plan.
c. If the firm also has 1,000 shares of preferred stock paying a $6.00 annual
dividend per share, what is the DFL?
d. Plot the financing plan, including the 1,000 shares of $6.00 preferred stock,
on the axes used in part b.
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