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:

Production Costs

The expenses incurred in the process of creating a product or service, including labor, materials, and overhead costs.

Taxes

Compulsory financial charges levied by a government on individuals, corporations, and transactions to fund public expenditures.

Oil Price

The cost per barrel of crude oil as determined by global markets.

Favorable Supply Shock

An unexpected event that increases the supply of a product or service, leading to a lower equilibrium price and/or an increase in the equilibrium quantity.