An investor owns 500 shares of stock in a ﬁrm with a debt/equity ratio = 1.0. The investor prefers an all-equity ﬁrm. If the stock price is $2 per share, what should the investor do?
A) Borrow $500 and buy 250 new shares.
B) Borrow $1,500 and buy 750 new shares.
C) Borrow $2,500 and buy 1,250 new shares.
D) Sell 250 shares and lend $500.
E) Sell 25 shares and lend $50.

Question

Quizplus · Accepted Answer

The investor should sell 250 shares to reduce their equity exposure and lend $500 to offset the firm's debt, effectively creating a personal all-equity position.

An Investor Owns 500 Shares of Stock in a ﬁRm