Bryan invested in Bryco stock when the firm was financed solely with equity.The firm is now utilizing debt in its capital structure.To unlever his position,Bryan needs to
A)borrow some money and purchase additional shares of Bryco stock.
B)sell some shares of Bryco stock and loan out the sale proceeds.
C)sell some shares of Bryco stock and hold the proceeds in cash.
D)maintain his current position because the firm's use of leverage did not affect him.
E)sell some of his shares and also borrow money to increase his cash reserves.

Question

Quizplus · Accepted Answer

To unlever his position, Bryan needs to sell some shares of Bryco stock and loan out the sale proceeds. This will reduce his exposure to the firm's leverage because he will not be holding as many assets that are affected by changes in the firm's debt levels. Alternatively, he could also borrow money and use it to pay off some of his investment in Bryco stock, but this would not be the best choice because it would increase his own debt levels and potentially make his overall financial position more risky. Holding shares in cash (choice C) or selling some of his shares and borrowing money to increase cash reserves (choice E) would also not be optimal because they would not effectively reduce his exposure to the firm's leverage.

Bryan Invested in Bryco Stock When the Firm Was Financed