Less Debt Inc.just revised its capital structure such that the firm's debt-equity ratio decreased from 0.80 to 0.40.Those individual investors who prefer the old capital structure:
A)should sell half of their equity holdings and invest in cash
B)should loan out funds equivalent to the amount invested in Less Debt
C)can replicate that structure by increasing their use of homemade leverage
D)should sell half of their equity holdings and loan out the net proceeds of the sale
E)can replicate that structure by reducing their debt and doubling their investment in the firm

Question

Quizplus · Accepted Answer

Those who prefer the old capital structure can replicate it by increasing their use of homemade leverage, which means borrowing funds personally and investing them in Less Debt to increase the debt-equity ratio to their preferred level. Selling equity holdings, investing in cash, or loaning out funds are not necessary or relevant to achieving their desired capital structure.