You Own 400 Shares of Kaiser

question 109

Multiple Choice

You own 400 shares of Kaiser. Kaiser is currently an all equity firm that has 12,000 shares of stock outstanding at a market price of $50 a share. The company's earnings before interest and taxes are
$20,000. The dividend payout ratio is 100%. Kaiser has decided to issue $100,000 of debt at a 9%
Rate of interest. This $100,000 will be used to repurchase shares of stock. How many shares of
Kaiser stock must you sell to unlever your position if you can loan out funds at a 9% rate of interest?

• A) 67 shares
• B) 100 shares
• C) 133 shares
• D) 160 shares
• E) 200 shares

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Definitions:

Markowitz Model

A portfolio optimization theory that demonstrates how to achieve the best portfolio allocation to maximize return for a given level of risk through diversification.

Systematic Risk

The risk inherent to the entire market or entire market segment, which cannot be eliminated through diversification.

Index Model

A model that describes the relationship between the returns of a stock and the returns of a market index.

Covariance

A measure of the degree to which two variables move in relation to each other, with a positive covariance indicating that they tend to move in the same direction.