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

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?    A.  120 shares B.  150 shares C.  180 shares D.  200 shares E.  250 shares JKL interest = $1m × 0.08 = $80,000 JKL shares repurchased = $1m/$40 = 25,000 JKL shares outstanding with debt = 75,000 - 25,000 = 50,000 JKL EPS, no debt = $140,000/75,000 = $1.866667 JKL EPS, with debt = ($140,000 - $80,000)/50,000 = $1.20 JKL value of stock = 50,000 × $40 = $2m JKL value of debt = $1m JKL total value = $2m + $1m = $3m JKL weight stock = $2m/$3m = 2/3 JKL weight debt = $1m/$3m = 1/3 Your initial investment = 600 × $40 = $24,000 Your new stock position = 2/3($24,000) = $16,000 Your new number of shares = $16,000/$40 = 400 Number of shares sold = 600 - 400 = 200 shares Check: Your new loans = 1/3($24,000) = $8,000 Your unlevered income = 600 × $1.866667 = $1,120 Your levered income = (400 × $1.20) + ($8,000 × 0.08) = $1,120

59.

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 $102,000. 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.    A.  322 shares B.  350 shares C.  362 shares D.  425 shares E.  502 shares Naylor's interest = $825,000 × 0.075 = $61,875 Naylor's shares repurchased = $825,000/$50 = 16,500 Naylor's shares outstanding with debt = 60,000 - 16,500 = 43,500 Naylor's EPS, no debt = $102,000/60,000 = $1.70 Naylor's EPS, with debt = ($102,000 - $61,875)/43,500 = $.9224138 Naylor's value of stock = 43,500 × $50 = $2,175,000 Naylor's value of debt = $825,000 Naylor's total value = $2,175,000 + $825,000 = $3,000,000 Naylor's weight stock = $2,175,000/$3,000,000 = 0.725 Naylor's weight debt = $825,000/$3,000,000 = 0.275 Your initial investment = 500 × $50 = $25,000 Your new stock position = 0.725 × $25,000 = $18,125 Your new number of shares = $18,125/$50 = 362.5 shares Check: Your new loans = 0.275 × $25,000 = $6,875 Your unlevered income = 500 × $1.70 = $850 Your levered income = (362.5 × $0.9224138) + ($6,875 × 0.075) = $850

Miller's Dry Goods is an all equity firm with 48,000 shares of stock outstanding at a market price of $50 a share

Miller's Dry Goods is an all equity firm with 48,000 shares of stock outstanding at a market price of $50 a share. The company's earnings before interest and taxes are $128,000. Miller's has decided to add leverage to its financial operations by issuing $250,000 of debt at 8 percent interest. The debt will be used to repurchase shares of stock. You own 400 shares of Miller's stock. You also loan out funds at 8 percent interest. How many shares of Miller's stock must you sell to offset the leverage that Miller's is assuming? Assume you loan out all of the funds you receive from the sale of stock. Ignore taxes.    A.  35.6 shares B.  40.0 shares C.  41.67 shares D.  47.5 shares E.  50.1 shares Miller's interest = $250,000 × 0.08 = $20,000 Miller's shares repurchased = $250,000/$50 = 5,000 Miller's shares outstanding with debt = 48,000 - 5,000 = 43,000 Miller's EPS, no debt = $128,000/48,000 = $2.666667 Miller's EPS, with debt = ($128,000 - $20,000)/43,000 = $2.511628 Miller's value of stock = 43,000 × $50 = $2,150,000 Miller's value of debt = $250,000 Miller's total value = $2,150,000 + $250,000 = $2,400,000 Miller's weight stock = $2,150,000/$2,400,000 = 0.895833 Miller's weight debt = $250,000/$2,400,000 = 0.104167 Your initial investment = 400 × $50 = $20,000 Your new stock position = 0.895833 × $20,000 = $17,916.67 Your new number of shares = $17,916.67/$50 = 358.3333 Number of shares sold = 400 - 358.3333 = 41.67 shares Check: Your new loans = 0.104167 × $20,000 = $2,083.33 Your total unlevered income = 400 × $2.666667 = $1,066.67 Your total levered income = (358.3333 × $2.511628) + ($2,083.33 × 0.08) = $11,066.67

58.

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?    A.  120 shares B.  150 shares C.  180 shares D.  200 shares E.  250 shares JKL interest = $1m × 0.08 = $80,000 JKL shares repurchased = $1m/$40 = 25,000 JKL shares outstanding with debt = 75,000 - 25,000 = 50,000 JKL EPS, no debt = $140,000/75,000 = $1.866667 JKL EPS, with debt = ($140,000 - $80,000)/50,000 = $1.20 JKL value of stock = 50,000 × $40 = $2m JKL value of debt = $1m JKL total value = $2m + $1m = $3m JKL weight stock = $2m/$3m = 2/3 JKL weight debt = $1m/$3m = 1/3 Your initial investment = 600 × $40 = $24,000 Your new stock position = 2/3($24,000) = $16,000 Your new number of shares = $16,000/$40 = 400 Number of shares sold = 600 - 400 = 200 shares Check: Your new loans = 1/3($24,000) = $8,000 Your unlevered income = 600 × $1.866667 = $1,120 Your levered income = (400 × $1.20) + ($8,000 × 0.08) = $1,120