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)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.
C)sell some shares of Bryco stock and hold the proceeds in cash.
D)maintain his current position as the debt of the firm did not affect his personal leverage position.
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

Unlevering a position means removing the effect of leverage. In this case, the firm is now utilizing debt in its capital structure, which means its overall risk has increased. To unlever his position, Bryan needs to create a personal debt-equity ratio equal to that of the firm, which means he needs to introduce some debt in his personal portfolio. Option B involves selling some shares of Bryco and creating a personal debt-equity ratio that matches that of the firm. Option A involves introducing personal debt but does not involve selling shares, so it does not achieve the objective of unlevering the position. Option C would result in a reduction in the overall portfolio value without reducing the overall risk, so it is not a suitable solution. Option D is incorrect as the introduction of debt in the firm's capital structure does affect personal leverage positions. Option E has an arbitrary threshold and does not consider the current debt-equity ratio of the firm.

Bryan Invested in Bryco,Inc