Question
In: Finance
You own 1,500 shares of stock in a company that is 25% debt financed. The stock...
You own 1,500 shares of stock in a company that is 25% debt financed. The stock price is $50 per share. You want to use homemade leverage to unlever your shares to replicate an all-equity capital structure. What amount will you borrow or lend?
Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit any commas and the $ sign in your response. For example, an answer of $1,000.50 should be entered as 1000.50.
Solutions
Expert Solution
|
Company is 25% Debt financed. so debt ratio is 25% |
|
|
Investor value of shares = number of shares * Market value per share |
|
| 1500*50 | |
| 75000 | |
|
To create homemade un leverage position(all Equity), Investor will have to lend that amount of which has been borrowed by Firm that is 25% |
|
|
So 25% of Investment value will be lend by investor to create unleveraged position. |
|
| 75000*25%= | 18750 |
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So investor will have to lend $18750 to create an homemade unlevereged position |
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