In the scenario that you currently own 600 shares of JKL, Inc
Question
In the scenario that you currently own 600 shares of JKL, Inc. JKL is an all equity that has 300,000 shares of stock outstanding at a market price of $25 a share. The company’s earnings before interest and taxes are $1,500,000.
You believe that the JKL should finance 20 percent of assets with debt, but management refuses to leverage the company. Given that similar firms’ pay 8 percent interest on their debt, answer the following questions.
Part A: How much money should you borrow to create the leverage on your own? Assume you can borrow funds at 8 percent interest.
Part B: How many additional shares of JKL stock must you purchase to create the leverage on your own?
