Bryan invested in Bryco, Inc. 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) Maintain his current position as the debt of the firm did not affect his personal leverage position.
C) Sell some shares of Bryco stock and hold the proceeds in cash.
D) Sell some shares of Bryco stock and loan it out such that he creates a personal debt-equity ratio equal to that of the firm.
E) Create a personal debt-equity ratio that is equal to exactly 50% of the debt-equity ratio of the firm.

Question

Quizplus · Accepted Answer

To unlever his position, Bryan needs to adjust his personal portfolio to offset the leverage introduced by the firm's use of debt. This involves selling some of his equity in the firm and using the proceeds to create a personal debt-equity ratio that mirrors the firm's new structure. This way, he can maintain a similar risk exposure as before the firm leveraged up.

Bryan Invested in Bryco, Inc