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 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)

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter18: Initial Public Offerings, Investment Banking, And Capital Formation

Section: Chapter Questions

Problem 9MC

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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?
a) You currently own 600 shares of JKL, Inc. JKL is an all-equity firmthat has 75,000 shares of stock outstanding at a market price of $40a 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 sharesof JKL stock must you sell to unlever your position if you can loanout 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? (Max50 words) Give a step by step break down of the answer
a) You currently own 600 shares of JKL, Inc. JKL is an all-equity firmthat has 75,000 shares of stock outstanding at a market price of $40a 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 sharesof JKL stock must you sell to unlever your position if you can loanout 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?
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You currently own 600 shares of JKL, Inc. JKL is an all-equity firmthat has 75,000 shares of stock outstanding at a market price of $40a 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 sharesof JKL stock must you sell to unlever your position if you can loanout 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?
You own 100 shares of stock of unlevered Shaan Company which has 1,000 shares outstanding. Shaan plans to pay S2,200 dividend at the end of the current year (i.e., one year from today) and a liquidating dividend of $4,840 at the end of 2 years from today. The required return on Shaan's stock is 10 percent. Ignoring taxes and transaction costs: a) What is the value of your shares of stock? Show calculations to support your answer. b) Suppose shareholders want Shaan to increase its $2,200 dividend payout at the end of the current year to $3,102 and Shaan increases the dividend by issuing at the end of the current year new stock worth the amount needed to increase the dividend. What will be the value of your shares under this scenario? Show calculations to support your answer. c) How many shares will be issued to the new stockholders at the end of the current year? Show calculations.
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