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Martin & Sons (M&S) currently is an all equity firm with 40,000 shares of stock outstanding at a market price of $25 a share.

 

Martin & Sons (M&S) currently is an all equity firm with 40,000 shares of stock outstanding at a market price of $25 a share. The company's earnings before interest and taxes (EBIT) are $80,000. M&S has decided to add leverage to their financial operations by issuing $500,000 of debt with a 7% interest rate. This $500,000 will be used to repurchase shares of stock. You own 4 1,000 shares of M&S stock. You also loan out funds at a 7% interest rate. How many of your shares of stock in M&S must you sell to offset the leverage that the firm is assuming? Assume that you loan out all of the funds you receive from the sale of your stock.

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