Katz is an all-equity development company that has 36,000 shares of stock outstanding at a market price of $25 a share.The firm's earnings before interest and taxes are $29,000.Katz has decided to issue $200,000 of debt at a rate of 6 percent and use the proceeds to repurchase shares.What should Leslie do if she owns 600 shares of Katz stock and wants to use homemade leverage to offset the leverage being assumed by the firm?

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Shares repurchased = $200,000/$25 = 8,000Value of equity = (36,000 - 8,000) × $25 = $700,000Value of debt = $200,000Debt ratio = $200,000/($700,000 + $200,000) = 0.2222Since the firm is using 22.22 percent debt, Faith will need to reduce her investment in the firm by 22.22 percent.Shares to be sold = 600 × 0.2222 = 133 shares

Katz Is an All-Equity Development Company That Has 36,000 Shares