P12–12 Degree of financial leverage Northwestern Savings and Loan has a current capital structure consisting 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

(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.