Question
Kashmeera Industries Ltd. claims to be financed with 100% equity with 70,000 shares of stock outstanding at a market price of $8 a share. The
Kashmeera Industries Ltd. claims to be financed with 100% equity with 70,000 shares of stock outstanding at a market price of $8 a share. The company has earnings before interest and taxes of $42,000. The company is making a plan to issue $200,000 of debt at a 7% rate of interest. The $200,000 is likely to be used to buy back shares of the outstanding stock. As of now, you hold 1,500 shares of Kashmeeras stock.
How many shares of this stock must you sell to unlever your position if you can loan out funds at a 7% rate of interest?Also comment on the capital of the firm in line with M&M proposition.
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