Please show exact formulas and calculations. Thank you! You currently own 600 sh

Question

Please show exact formulas and calculations. Thank you!

You currently own 600 shares of JKL, Inc. JKL is an all equity firm that has 75,000 shares of stock outstanding at a market price of $40 a share. The company's earnings before interest and taxes are $140,000. JKL has decided to issue $1 million of debt at 8 percent interest. This debt will be used to repurchase shares of stock. How many shares of JKL stock must you sell to unlever your position if you can loan out funds at 8 percent interest? Ignore taxes.
HINT: You unwind leverage by holding debt and equity in the levered company that is proportional to the levered company's capital structure. Start by finding the new capital structure (debt-equity ratio) if the firm issues the debt.
120 shares
150 shares
180 shares (180 shares is a wrong answer)
200 shares
250 shares

Explanation / Answer

The new capital structure:-
Equity: 75000*40 = 3000000
Debt = 1000000
Total Capital = 4000000
Therefore equity = .75
And Debt = .25
Hence no of shares to be sold = 600*.25
Hence no of shares to be sold = 150

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