Martin and Sons (M and S) currently is an all equity firm with 64,000 shares of
ID: 2725451 • Letter: M
Question
Martin and Sons (M and S) currently is an all equity firm with 64,000 shares of stock outstanding at a market price of $25 a share. The company's earnings before interest and taxes are $86,000. M and S has decided to add leverage to their financial operations by issuing $480,000 of debt with a 7% percent interest rate. This $480,000 will be used to repurchase shares of stock. You own 2,700 shares of M and S stock. You also loan out funds at a 7% percent rate of interest. How many of your shares of stock in M and 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.
810 shares
203 shares
867 shares
753 shares
842 shares
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Explanation / Answer
M and S shares redeemed => 480000 / 25 => 19200 shares
Shares you need to sell => 2700 * ( 19200 / 64000) => 810 Shares
Shares of stock in M and S must you sell to offset the leverage that the firm is assuming => 810 Shares
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