Miller's Dry Goods is an all equity firm with 48,000 shares of stock outstanding at a market price of $50 a share.The company's earnings before interest and taxes are $128,000.Miller's has decided to add leverage to its financial operations by issuing $250,000 of debt at 8 percent interest.The debt will be used to repurchase shares of stock.You own 400 shares of Miller's stock.You also loan out funds at 8 percent interest.How many shares of Miller's stock must you sell to offset the leverage that Miller's is assuming? Assume you loan out all of the funds you receive from the sale of stock.Ignore taxes.

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Miller's interest = $250,000 × 0.08 = $20,000Miller's shares repurchased = $250,000/$50 = 5,000Miller's shares outstanding with debt = 48,000 - 5,000 = 43,000Miller's EPS, no debt = $128,000/48,000 = $2.666667Miller's EPS, with debt = ($128,000 - $20,000)/43,000 = $2.511628Miller's value of stock = 43,000 × $50 = $2,150,000Miller's value of debt = $250,000Miller's total value = $2,150,000 + $250,000 = $2,400,000Miller's weight stock = $2,150,000/$2,400,000 = 0.895833Miller's weight debt = $250,000/$2,400,000 = 0.104167Your initial investment = 400 × $50 = $20,000Your new stock position = 0.895833 × $20,000 = $17,916.67Your new number of shares = $17,916.67/$50 = 358.3333Number of shares sold = 400 - 358.3333 = 41.67 sharesCheck:Your new loans = 0.104167 × $20,000 = $2,083.33Your total unlevered income = 400 × $2.666667 = $1,066.67Your total levered income = (358.3333 × $2.511628) + ($2,083.33 × 0.08) = $11,066.67

Miller's Dry Goods Is an All Equity Firm with 48,000