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 $102,000.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 = $825,000 × 0.075 = $61,875Naylor's shares repurchased = $825,000/$50 = 16,500Naylor's shares outstanding with debt = 60,000 - 16,500 = 43,500Naylor's EPS, no debt = $102,000/60,000 = $1.70Naylor's EPS, with debt = ($102,000 - $61,875)/43,500 = $.9224138Naylor's value of stock = 43,500 × $50 = $2,175,000Naylor's value of debt = $825,000Naylor's total value = $2,175,000 + $825,000 = $3,000,000Naylor's weight stock = $2,175,000/$3,000,000 = 0.725Naylor's weight debt = $825,000/$3,000,000 = 0.275Your initial investment = 500 × $50 = $25,000Your new stock position = 0.725 × $25,000 = $18,125Your new number of shares = $18,125/$50 = 362.5 sharesCheck:Your new loans = 0.275 × $25,000 = $6,875Your unlevered income = 500 × $1.70 = $850Your levered income = (362.5 × $0.9224138) + ($6,875 × 0.075) = $850

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