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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?

Respuesta :

Answer:

Explanation:

Share repurchased = 176,000/ 32 = 5,500

Value of Equity = (52,000 - 5,500) x 32 = 1,488,000

Value of debt = 176,000

Debt Ratio = 176,000/ (176,000 + 1,488,000) = .10576

Leslie needs to reduce its investment in the firm by 10.576%

Leslie will sold stocks = .10576 x 500 = 53 shares

Therefore, Leslie need to Sell 53 shares and loan out the proceeds.

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