Sampras, Inc. is considering to convert its all-equity capital structure to one that is 40 percent debt. Currently, there are 1,000 shares outstanding and the price per share is $70. EBIT is expected to remain at $7,000 per year forever. The interest rate on new debt is 7 percent, and there are no taxes.

Suppose Sampras does convert, but investor prefers the current all-equity capital structure. Show how she could unlever her shares of stock to recreate the original capital structure.

(Hint: in order to undo the firm's leverage decision an investor should do the opposite to what the companies does. If the company borrows, he/she has to lend the same proportions of his/her cash.)

A. Sell 60 shares of stock and lend the proceeds at 7%

B. Sell 40 shares of stock and lend the proceeds at 7%

C. Sell 20 shares of stock and lend the proceeds at 7%

D. By additional 20 shares of stock by borrowing 7%

E. By additional 40 shares of stock by borrowing 7%