DFL and graphical display of financing plans: Wells and Associates has EBIT of $65,000. Interest costs are $16,700, and the firm has 14,300 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 1,100 shares of preferred stock paying a $6.50 annual dividend per share, what is the DFL?
d. Plot the financing plan, including the 1,100 shares of $6.50 preferred stock, on the axes used in part b.
e. Briefly discuss the graph of the two financing plans.