You currently own 1400 shares of JKL, Inc. JKL is an all equity that has 800000

Question

You currently own 1400 shares of JKL, Inc. JKL is an all equity that has 800000 shares of stock outstanding at a market price of $40 a share. The company's earnings before interest and taxes are $6,400,000. You believe that the JKL should finance 50 percent of assets with debt, but management refuses to leverage the company. Given that similar firms' pay 9 percent interest on their debt, answer the following questions.

Part A: How much money should you borrow to create the leverage on your own? Assume you can borrow funds at 9 percent interest.

Part B: How many additional shares of JKL stock must you purchase to create the leverage on your own?

Part A: How much money should you borrow to create the leverage on your own? Assume you can borrow funds at 9 percent interest.

Part B: How many additional shares of JKL stock must you purchase to create the leverage on your own?

Explanation / Answer

Total Number of stock hold = 1,400

Price per share = $40

a.

Total Amount money should you borrow to create the leverage on your own will be total value of stock Hold, because you wants 50% leverage.

Total amount borrow = $40 × 1,400

                                  = $56,000

Hence, total value of borrow to create 50% leverage is $56,000.

b.

Number of additional share purchase = $56,000 / $40

                                                            = 1,400

Number of additional shares of JKL stock must you purchase to create the leverage on your own is 1,400.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.