New capital structure if the firm issues the debt

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Reference no: EM13811784

You currently own 600 shares of JKL, Inc. JKL is an all equity firm that has 75,000 shares of stock outstanding at a market price of $40 a share. The company's earnings before interest and taxes are $140,000. JKL has decided to issue $1 million of debt at 8 percent interest. This debt will be used to repurchase shares of stock. How many shares of JKL stock must you sell to unlever your position if you can loan out funds at 8 percent interest? Ignore taxes.

HINT: You unwind leverage by holding debt and equity in the levered company that is proportional to the levered company's capital structure. Start by finding the new capital structure (debt-equity ratio) if the firm issues the debt.

120 shares

150 shares

180 shares

200 shares

250 shares

Reference no: EM13811784

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