Naylor's is an all equity firm with 60,000 shares of stock outstanding at a market price of $50 a share. The company has earnings before interest and taxes of $87,000. Naylor's has decided to issue $750,000 of debt at 7.5 percent. The debt will be used to repurchase shares of the outstanding stock. Currently, you own 500 shares of Naylor's stock. How many shares of Naylor's stock will you continue to own if you unlever this position? Assume you can loan out funds at 7.5 percent interest. Ignore taxes.

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Naylor's interest = $750,000 F1F1F1S1F1F1F10 0.075 = $56,250Naylor's shares repurchased = $750,000/$50 = 15,000Naylor's shares outstanding with debt = 60,000 - 15,000 = 45,000Naylor's EPS, no debt = $87,000/60,000 = $1.45Naylor's EPS, with debt = ($87,000 - $56,250)/45,000 = $0.683333Naylor's value of stock = 45,000 F1F1F1S1F1F1F10 $50 = $2,250,000Naylor's value of debt = $750kNaylor's total value = $2,250,000 + $750,000 = $3,000,000Naylor's weight stock = $2,250,000/$3,000,000 = 0.75Naylor's weight debt = $750,000/$3,000,000 = 0.25Your initial investment = 500 F1F1F1S1F1F1F10 $50 = $25,000Your new stock position = 0.75 F1F1F1S1F1F1F10 $25,000 = $18,750Your new number of shares = $18,750/$50 = 375 sharesCheck:Your new loans = 0.25 F1F1F1S1F1F1F10 $25,000 = $6,250Your unlevered income = 500 F1F1F1S1F1F1F10 $1.45 = $725Your levered income = (375 F1F1F1S1F1F1F10 $0.683333) + ($6,250 F1F1F1S1F1F1F10 0.075) = $725

Naylor's Is an All Equity Firm with 60,000 Shares of Stock