Question
You currently own 1,300 shares of JKL, Inc. JKL is an all equity that has 1,000,000 shares of stock outstanding at a market price of
You currently own 1,300 shares of JKL, Inc. JKL is an all equity that has 1,000,000 shares of stock outstanding at a market price of $20 a share. The company's earnings before interest and taxes are $4,000,000. JKL has decided to issue $2,000,000 of debt at 10 percent interest. This debt will be used to repurchase shares of stock.Ignore taxes and answer the following two questions:
Part A: What is the target debt to asset ratio?
Part B: How many shares of JKL stock must you sell to undo the leverage if you can loan out funds at 10 percent interest? |
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