Katz is an all-equity development company that has 52,000 shares of stock outstanding at a market price of $32 a share.The firm's earnings before interest and taxes are $46,000.Katz has decided to issue $176,000 of debt at a rate of 8 percent and use the proceeds to repurchase shares.What should Leslie do if she owns 500 shares of Katz stock and wants to use homemade leverage to offset the leverage being assumed by the firm?
A)Borrow money and buy an additional 53 shares
B)Borrow money and buy an additional 56 shares
C)Sell 48 shares and loan out the proceeds
D)Sell 56 shares and loan out the proceeds
E)Sell 53 shares and loan out the proceeds

Question

Quizplus · Accepted Answer

Leslie should sell 53 shares and loan out the proceeds to offset the leverage. The firm is repurchasing shares, reducing the number of shares outstanding, and Leslie needs to adjust her position to maintain her original level of equity exposure.

Katz Is an All-Equity Development Company That Has 52,000 Shares