Clover Fields Is an All Equity Firm with 55,000 Shares

question 350

Multiple Choice

Clover Fields is an all equity firm with 55,000 shares of stock outstanding at a market price of $17.50 a share. The company has earnings before interest and taxes of $115,500. Clover Fields decides to issue $350,000 of debt at an 8% rate of interest. The debt will be used to repurchase shares of the outstanding stock. Currently, you own 800 shares of Clover Fields stock. How many shares of this stock must you sell to unlever your position if you can lend out funds at an 8% rate of interest?

• A) 177 shares
• B) 209 shares
• C) 236 shares
• D) 274 shares
• E) 291 shares

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Definitions:

Left-Tailed Area

Refers to the area under the probability distribution curve to the left of a specified value, often used in hypothesis testing to determine significance.

Multinomial Experiment

An experiment or trial that results in outcomes classified into more than two categories, where the probabilities of outcomes are fixed.

Trials

Refers to the number of times an experiment is performed or the number of individual tests run in a statistical analysis.

Degrees Of Freedom

The number of independent values or quantities which can be assigned to a statistical distribution without violating any constraints.