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You currently own 600 shares of JKL, Inc. JKL is an all-equity firm that has 75,000 shares of stock outstanding at a market price of $40 a share. The company’s earnings before interest and taxes are $140,000. JKL has decided to issue $1 million of debt at 8 percent interest. This debt will be used to repurchase shares of stock. How many shares of JKL stock must you sell to unlever your position if you can loan out funds at 8 percent interest? b) If the cost of equity is 25%, the WACC is 16% and cost of debt is 10%, what will be the implied D/E ratio?

You currently own 600 shares of JKL, Inc. JKL is an all-equity firm that has 75,000 shares of stock outstanding at a market price of $40 a share. The company’s earnings before interest and taxes are $140,000. JKL has decided to issue $1 million of debt at 8 percent interest. This debt will be used to repurchase shares of stock. How many shares of JKL stock must you sell to unlever your position if you can loan out funds at 8 percent interest? b) If the cost of equity is 25%, the WACC is 16% and cost of debt is 10%, what will be the implied D/E ratio?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter15: Dividend Policy
Section: Chapter Questions
Problem 2P
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You currently own 600 shares of JKL, Inc. JKL is an all-equity firm
that has 75,000 shares of stock outstanding at a market price of $40
a share. The company’s earnings before interest and taxes are $140,000.
JKL has decided to issue $1 million of debt at 8 percent interest.
This debt will be used to repurchase shares of stock. How many shares
of JKL stock must you sell to unlever your position if you can loan
out funds at 8 percent interest?

b) If the cost of equity is 25%, the WACC is 16% and cost of debt is 10%,
what will be the implied D/E ratio? 

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