Naylor's is an all-equity firm with 48,000 shares of stock outstanding at a market price of $25 a share. The company has earnings before interest and taxes of $87,000. Naylor's has decided to issue $400,000 of debt at 7.3 percent and use the proceeds to repurchase shares. Currently, Angela owns 600 shares of Naylor's stock. How many shares of this stock will she continue to own if she unlevers this position? Assume she can loan out funds at 7.3 percent interest. Ignore taxes.

Question

Quizplus · Accepted Answer

Angela will continue to own 400 shares if she unlevers her position. She initially owns 600 shares. The firm is repurchasing shares with the debt proceeds, reducing the number of shares outstanding. The value of the firm remains the same, so Angela can sell enough shares to offset the debt effect, keeping her investment value constant.

Naylor's Is an All-Equity Firm with 48,000 Shares of Stock