UNLEV Has an Expected Perpetual EBIT = $4,000

question 154

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. The stockholder
Prefers a debt/equity ratio = 1.0. How could the stockholder use homemade leverage to achieve the
Restructuring without the help of UNLEV? 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 $667 and sell 300 shares of UNLEV.
• E) The stockholder should lend $1,337 and sell 667 shares of UNLEV.

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Definitions:

Self-Actualized

A state in which an individual realizes their potentialities and seeks personal growth and fulfillment.

Aversion Therapy

A form of psychological treatment where negative stimuli are associated with undesirable behaviors to reduce their occurrence.

Desensitization

The process of reducing or eliminating sensitivity to a stimulus, often used as a therapeutic technique to manage phobias or anxiety disorders.

Psychodynamic Therapy

A therapeutic approach that emphasizes understanding the psychological forces underlying human behavior, feelings, and emotions and how they may relate to early experiences.