Chapter 11 leverage and capital structure 457 a using

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Unformatted text preview: pays taxes at the rate of 40%. CHAPTER 11 Leverage and Capital Structure 457 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 (DFL). 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 11–11 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 the firm. 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. e. Briefly discuss the...
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