Russell%u2019s Enterprises changed its capital structure from an all-equity firm
ID: 2702132 • Letter: R
Question
Russell%u2019s Enterprises changed its capital structure from an all-equity firm to one with 40 percent debt financing. The cost of debt is 8 percent. Wayne owns 300 shares of Russell%u2019s stock and prefers the firm be all equity financed. What can Wayne do to offset Russell%u2019s use of leverage? Ignore taxes.
a. borrow money and purchase an additional 120 shares of Russell%u2019s stock
b. sell all his shares in Russell and loan out the proceeds
c. borrow money equal to his investment in Russell%u2019s and loan out the borrowed funds at 8 percent
d. sell 120 shares of Russell%u2019s stock and loan out the proceeds at 8 percent
Explanation / Answer
a. borrow money and purchase an additional 120 shares of Russell%u2019s stock
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