P12–14 DFL and graphical display of financing plans Wells and Associates has an 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 graph of the two financing plans.