UNLEV Has an Expected Perpetual EBIT = $4,000

question 357

Multiple Choice

UNLEV has an expected perpetual EBIT = $4,000. The unlevered cost of capital = 15% and there are 20,000 shares of stock outstanding. The firm is considering issuing $8,800 in new par bonds to add financial leverage to the firm. The proceeds of the debt issue will be used to repurchase equity. The cost of debt = 10% and the tax rate = 34%. There are no flotation costs.

Assume a stockholder owns 1,000 shares of UNLEV before the restructuring. Also assume UNLEV's debt/equity ratio will be 0.493 after the restructuring. How could the stockholder use homemade leverage to unlever her investment in the firm after the restructuring? Assume there are no taxes.

• A) The stockholder should borrow $1,330 and buy 1,000 more shares of UNLEV.
• B) The stockholder should borrow $2,660 and buy 1,000 more shares of UNLEV.
• C) The stockholder should borrow $1,330 and buy 2,000 more shares of UNLEV.
• D) The stockholder should lend $443 and sell 333 shares of UNLEV.
• E) The stockholder should lend $1,337 and sell 667 shares of UNLEV.

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