Naylor's is an all equity firm with 60,000 shares of stock outstanding at a market price of $50 a share. The company has earnings before interest and taxes of $87,000. Naylor's has decided to issue $750,000 of debt at 7.5 percent. The debt will be used to repurchase shares of the outstanding stock. Currently, you own 500 shares of Naylor's stock. How many shares of Naylor's stock will you continue to own if you unlever this position? Assume you can loan out funds at 7.5 percent interest. Ignore taxes.
300 shares
350 shares
375 shares
425 shares
500 shares
Naylor's is an all equity firm with 60,000 shares of stock outstanding at a market price of $50 a share. The company has earnings before interest and taxes of $87,000. Naylor's has decided to issue $750,000 of debt at 7.5 percent. The debt will be used to repurchase shares of the outstanding stock. Currently, you own 500 shares of Naylor's stock. How many shares of Naylor's stock will you continue to own if you unlever this position? Assume you can loan out funds at 7.5 percent interest. Ignore taxes.
300 shares
350 shares
375 shares
425 shares
500 shares
Related questions
You currently own 1,300 shares of JKL, Inc. JKL is an all equity that has 300,000 shares of stock outstanding at a market price of $15 a share. The company's earnings before interest and taxes are $900,000. You believe that the JKL should finance 20 percent of assets with debt, but management refuses to leverage the company. Given that similar firms' pay 12 percent interest on their debt, answer the following questions.
| Part A: How much money should you borrow to create the leverage on your own? Assume you can borrow funds at 12 percent interest.
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| Part B: How many additional shares of JKL stock must you purchase (using the borrowed funds in Part A) to create the leverage on your own?
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