Martin & Sons (M&S) currently is an all equity firm with 40,000 shares of stock outstanding...

 

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Martin & Sons (M&S) currently is an all equity firm with 40,000 shares of stock outstanding at a market price of $25 a share. The company's earnings before interest and taxes (EBIT) are $80,000. M&S has decided to add leverage to their financial operations by issuing $500,000 of debt with a 7% interest rate. This $500,000 will be used to repurchase shares of stock. You own 4 1,000 shares of M&S stock. You also loan out funds at a 7% interest rate. How many of your shares of stock in M&S must you sell to offset the leverage that the firm is assuming? Assume that you loan out all of the funds you receive from the sale of your stock. Martin & Sons (M&S) currently is an all equity firm with 40,000 shares of stock outstanding at a market price of $25 a share. The company's earnings before interest and taxes (EBIT) are $80,000. M&S has decided to add leverage to their financial operations by issuing $500,000 of debt with a 7% interest rate. This $500,000 will be used to repurchase shares of stock. You own 4 1,000 shares of M&S stock. You also loan out funds at a 7% interest rate. How many of your shares of stock in M&S must you sell to offset the leverage that the firm is assuming? Assume that you loan out all of the funds you receive from the sale of your stock.

Answer rating: 100% (QA)

ANSWER To offset the leverage that the firm is assuming we need to determine the amount of d... View the full answer