Question
Naylors 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
Naylors 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. Naylors has decided to issue $825,000 of debt at 7.5 percent and use the proceeds to repurchase shares. What is the EPS for the unlevered vs. levered capital structure? Currently, you own 500 shares of Naylors stock. How many shares of this stock will you continue to own if you unlever this position? The levered firms capital structure debt weight is 27.50%. Assume you can loan out funds at 7.5 percent interest. Ignore taxes.
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