Question
You currently own 500 shares of GoGreen Inc.. GoGreen is an all-equity firm that has 150,000 shares of stock outstanding at a market price of
You currently own 500 shares of GoGreen Inc.. GoGreen is an all-equity firm that has 150,000 shares of stock outstanding at a market price of $25 a share. The company's earnings before interest and taxes are $200,000. Assume no corporate taxes. GoGreen has decided to issue $1,125,000 of debt at 10 percent interest. This debt will be used to repurchase shares of stock of the company. 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 (under 100% equity)?
A. borrow at 10% to purchase 500 additional shares of GoGreen
B. borrow at 10% to purchase 350 additional shares of GoGreen
C. borrow at 10% to purchase 250 additional shares of GoGreen
D. sell 150 shares of GoGreen and loan out the proceeds at 10%
E. sell 350 shares of GoGreen and loan out the proceeds at 10%
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