CH 13 Quiz Martin and Sons (M and S) currently is an all equity firm with 64,000
ID: 2719035 • Letter: C
Question
CH 13 Quiz
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 $610,000 of debt with a 8% percent interest rate. This $610,000 will be used to repurchase shares of stock. You own 1,600 shares of M and S stock. You also loan out funds at a 8% 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.
659 shares 610 shares 406 shares 561 shares 634 shares
Explanation / Answer
Given data,
Market Value per share = $25
Debt raised = $610000
Total number of shares in M and S = 64000
Number of shares belonging to me = 1600
Total number of shares to be bought back by M and S = Debt raised / Market value per share
=610000 / 25
=24400
Therefore, Number of shares to be bought back from me
=Total number of shares to be bought back by M and S / Total number of shares * shares belonging to me
= 24400 / 64000 * 1600
=610 shares
Number of shares that I must sell to offset the leverage = 610 shares