Shoe Box Stores is currently an all-equity firm with 28,000 shares of stock outs

Question

Shoe Box Stores is currently an all-equity firm with 28,000 shares of stock outstanding. Management is considering changing the capital structure to 40 percent debt. The interest rate on the debt would be 9 percent. Ignore taxes. Jamie owns 300 shares of Shoe Box Stores stock that is priced at $17 a share. What should Jamie do if she prefers the all-equity structure but Shoe Box Stores adopts the new capital structure?

A. Borrow money and buy an additional 120 shares.

B. Borrow money and buy an additional 180 shares.

C. Keep her shares but loan out all of the dividend income at 9 percent.

D. Sell 120 shares and loan out the proceeds at 9 percent.

E. Sell 180 shares and loan out the proceeds at 9 percent.

Explanation / Answer

D. Sell 120 shares and loan out the proceeds at 9 percent.

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