Miller's Dry Goods is an all equity firm with 45,000 shares of stock outstanding at a market price of $50 a share. The company's earnings before interest and taxes are $128,000. Miller's has decided to add leverage to its financial operations by issuing $250,000 of debt at 8 percent interest. The debt will be used to repurchase shares of stock. You own 400 shares of Miller's stock. You also loan out funds at 8 percent interest. How many shares of Miller's stock must you sell to offset the leverage that Miller's is assuming? Assume you loan out all of the funds you receive from the sale of stock. Ignore taxes. A. 35.6 shares B. 40.0 shares C. 44.4 shares D. 47.5 shares E. 50.1 shares

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Miller's Dry Goods is an all equity firm with 45,000 shares of stock outstanding at a market price
of $50 a share. The company's earnings before interest and taxes are $128,000. Miller's has
decided to add leverage to its financial operations by issuing $250,000 of debt at 8 percent
interest. The debt will be used to repurchase shares of stock. You own 400 shares of Miller's
stock. You also loan out funds at 8 percent interest. How many shares of Miller's stock must you
sell to offset the leverage that Miller's is assuming? Assume you loan out all of the funds you
receive from the sale of stock. Ignore taxes.
A. 35.6 shares
B. 40.0 shares
C. 44.4 shares
D. 47.5 shares
E. 50.1 shares
Transcribed Image Text:Miller's Dry Goods is an all equity firm with 45,000 shares of stock outstanding at a market price of $50 a share. The company's earnings before interest and taxes are $128,000. Miller's has decided to add leverage to its financial operations by issuing $250,000 of debt at 8 percent interest. The debt will be used to repurchase shares of stock. You own 400 shares of Miller's stock. You also loan out funds at 8 percent interest. How many shares of Miller's stock must you sell to offset the leverage that Miller's is assuming? Assume you loan out all of the funds you receive from the sale of stock. Ignore taxes. A. 35.6 shares B. 40.0 shares C. 44.4 shares D. 47.5 shares E. 50.1 shares
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