Martin and Sons (M and S) currently is an all equity firm with 72,000 shares of
ID: 2737734 • Letter: M
Question
Martin and Sons (M and S) currently is an all equity firm with 72,000 shares of stock outstanding at a market price of $30 a share. The company's earnings before interest and taxes are $88,000. M and S has decided to add leverage to their financial operations by issuing $630,000 of debt with a 10% percent interest rate. This $630,000 will be used to repurchase shares of stock. You own 1,800 shares of M and S stock. You also loan out funds at a 10% 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.
473 shares
525 shares
548 shares
578 shares
380 shares
Explanation / Answer
Number of shares repurchased:
= $630,000/$30
= 21,000
Shares repurchased as a % of total shares:
= 21,000/72,000
= 29.17%
Number of shares i must sell:
= 1,800*29.17%
= 525 shares
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