Question

Lara's Inc. Is currently an unlevered firm with 450,000 shares of stock outstanding, with a market price of $15 a share. The company has earnings before interest and taxes of $314,000. Lara's met with his bankers, Warne Incorporated and agreed to borrow $825,000, at 5 percent. You are an ardent investor and you currently own 20,000 shares of Lara's stock. If you seek to unlevered your position; how many shares of Lara's stock will you continue to own, if you can loan out funds at 5 percent interest? Ignore taxes in your deliberations. Kindly show all workings.

Answer 1

Answer:

Step-by-step explanation:

Value of firm = Number of shares×Market price per share

= 450,000 × $15

= $6,750,000

Value of debt = $825,000

Weight of debt = $825,000 / $6,750,000 = 12.22%

Number of shares continue to own = 20,000 × (1 - 12.22%) = 17,555.56 or 17,556 shares

Number of shares continue to own = 17,555.56 or 17,556 shares