Jessica invested in Quantro stock when the firm was unlevered.Since then,Quantro has changed its capital structure and now has a debt-equity ratio of 0.30.To unlever her position,Jessica needs to:
A)borrow some money and purchase additional shares of Quantro stock.
B)maintain her current equity position as the debt of the firm did not affect her personally.
C)sell some shares of Quantro stock and hold the proceeds in cash.
D)sell some shares of Quantro stock and loan out the sale proceeds.
E)create a personal debt-equity ratio of 0.30.

Question

Quizplus · Accepted Answer

To unlever her position in a levered firm, Jessica needs to mimic the effect of the firm having no debt from her perspective. This involves reducing her exposure to the equity of the firm and creating a personal cash inflow that mimics the interest payments a debt holder would receive, effectively offsetting the firm's leverage. Selling some shares and loaning out the proceeds allows her to adjust her personal financial position to counterbalance the firm's debt, simulating an unlevered investment in the firm.

Jessica Invested in Quantro Stock When the Firm Was Unlevered