a) 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? b) If the cost of equity is 25%, the WACC is 16% and cost of debt is 10%, what will be the implied D/E ratio? c) Why is financial leverage considered as a fair-weather friend? (Max 50 words)
a) 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?
b) If the
what will be the implied D/E ratio?
c) Why is financial leverage considered as a fair-weather friend? (Max
50 words)
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