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 EBITEPS 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.