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Galt Industries has 50 million shares outstanding and a market capitalization of $1.25 billion.It also has $750 million in debt outstanding.Galt Industries has decided to delever the firm by issuing new equity and completely repaying all the outstanding debt.Assume perfect capital markets.
-Suppose you are a shareholder in Galt industries holding 100 shares,and you disagree with this decision to delever the firm.You can undo the effect of this decision by:
A)borrowing $1500 and buying 60 shares of stock.
B)selling 32 shares of stock and lending $800.
C)borrowing $1000 and buying 40 shares of stock.
D)selling 40 shares of stock and lending $1000.

Question

Quizplus · Accepted Answer

The correct answer is A because borrowing $1500 and buying 60 shares of stock will undo the effect of the decision to delever the firm. This is because the new equity issued will increase the number of shares outstanding, which will decrease the market value per share. By borrowing $1500 and buying 60 shares of stock, the shareholder can increase their ownership stake in the firm and offset the decrease in market value per share.

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