Question

Shoe Box Stores is currently an all-equity firm with 25,000 shares of stock outstanding. Management is considering changing the capital structure to 35 percent debt. The interest rate on the debt would be 8 percent. Ignore taxes. Jamie owns 600 shares of Shoe Box Stores stock that is priced at $22 a share. What should Jamie do if she prefers the all-equity structure but Shoe Box Stores adopts the new capital structure?a. Borrow money and buy an additional 180 shares b. Borrow money and buy an additional 210 shares c. Keep her shares but loan out all of the dividend income at 8 percent d. Sell 210 shares and loan out the proceeds at 8 percent e. Sell 180 shares and loan out the proceeds at 8 percent

Answer 1

Answer:

d. Sell 210 shares and loan out the proceeds at 8 percent

Explanation:

Since the firm is using 35 percent leverage, Jamie can offset the firm's leverage by selling shares and loaning out 35 percent of her investment at 8 percent interest.

Number of shares to be sold = 600 shares * 0.35 = 210 shares