Bryan invested in Bryco stock when the firm was financed solely with equity.The firm is now utilizing debt in its capital structure.To unlever his position,Bryan needs to
A)borrow some money and purchase additional shares of Bryco stock.
B)sell some shares of Bryco stock and loan out the sale proceeds.
C)sell some shares of Bryco stock and hold the proceeds in cash.
D)maintain his current position because the firm's use of leverage did not affect him.
E)sell some of his shares and also borrow money to increase his cash reserves.

Question

Quizplus · Accepted Answer

To unlever his position, Bryan needs to sell some shares of Bryco stock and loan out the sale proceeds. This is because levering the firm with debt increases the financial risk of the company, and consequently also affects the risk profile of the stock. By selling some shares and loaning out the proceeds, Bryan can reduce his exposure to this increased risk. By selling shares and keeping the proceeds in cash or borrowing money to increase his cash reserves, Bryan would not be unlevering his position.

Bryan Invested in Bryco Stock When the Firm Was Financed