DFL and graphical display of financing plans Wells and Associates has EBIT of $73,300. Interest costs are $20,100, and the firm has 15,300 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 1,500 shares of preferred stock paying a $5.50 annual dividend per share, what is the DFL? d. Plot the financing plan, including the 1,500 shares of $5.50 preferred stock, on the axes used in part (b). e. Briefly discuss the graph of the two financing plans. EBIT-EPS and preferred stock Litho-Print is considering two possible capital structures, A and B, shown in the following table. Assume a 40% tax rate. Source of capital Long-term debt Preferred stock Common stock Structure A Structure B $78,000 at 15.3% coupon rate $53,000 at 14.3% coupon rate $12,000 with an annual dividend of 18.1% $17,000 with an annual dividend of 18.1% 8,100 shares 10,100 shares a. Calculate two EBIT-EPS coordinates for each of the structures by selecting any two EBIT values and finding their associated EPS values. b. Graph the two capital structures on the same set of EBIT-EPS axes. c. Discuss the leverage and risk associated with each of the structures. d. Over what range of EBIT is each structure preferred? e. Which structure do you recommend f the firm expects its EBIT to be greater than $40,000? Explain. DFL and graphical display of financing plans Wells and Associates has EBIT of $73,300. Interest costs are $20,100, and the firm has 15,300 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 1,500 shares of preferred stock paying a $5.50 annual dividend per share, what is the DFL? d. Plot the financing plan, including the 1,500 shares of $5.50 preferred stock, on the axes used in part (b). e. Briefly discuss the graph of the two financing plans. EBIT-EPS and preferred stock Litho-Print is considering two possible capital structures, A and B, shown in the following table. Assume a 40% tax rate. Source of capital Long-term debt Preferred stock Common stock Structure A Structure B $78,000 at 15.3% coupon rate $53,000 at 14.3% coupon rate $12,000 with an annual dividend of 18.1% $17,000 with an annual dividend of 18.1% 8,100 shares 10,100 shares a. Calculate two EBIT-EPS coordinates for each of the structures by selecting any two EBIT values and finding their associated EPS values. b. Graph the two capital structures on the same set of EBIT-EPS axes. c. Discuss the leverage and risk associated with each of the structures. d. Over what range of EBIT is each structure preferred? e. Which structure do you recommend f the firm expects its EBIT to be greater than $40,000? Explain
