Question
You currently own 1000 shares of Apples Inc.. Apples is an all equity firm that has 80,000 shares of stock outstanding at a market price
You currently own 1000 shares of Apples Inc.. Apples is an all equity firm that has 80,000 shares of stock outstanding at a market price of $50 a share. The company's earnings before interest and taxes are $140,000. Apples has decided to issue $1 million of debt at 8 percent interest. This debt will be used to repurchase shares of stock.
If you prefer the original capital structure of 100% equity and the associated payoffs, you will take which of the following actions to achieve the original payoffs?
A. Borrow $37,500 at 8% to purchase another 750 shares B. Borrow $12,500 at 8% to purchase another 250 shares C. Sell 500 shares and loan out the proceeds at 8% D. Sell 250 shares and loan out the proceeds at 8% E. None of the above
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started