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30 March, 22:57

Lara's Inc. Is currently an unlevered firm with 450,000 shares of stock outstanding, with a market price of $15 a share. The company has earnings before interest and taxes of $314,000. Lara's met with his bankers, Warne Incorporated and agreed to borrow $825,000, at 5 percent. You are an ardent investor and you currently own 20,000 shares of Lara's stock. If you seek to unlevered your position; how many shares of Lara's stock will you continue to own, if you can loan out funds at 5 percent interest? Ignore taxes in your deliberations. Kindly show all workings.

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  1. 30 March, 23:08
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    Step-by-step explanation:

    Value of firm = Number of shares*Market price per share

    = 450,000 * $15

    = $6,750,000

    Value of debt = $825,000

    Weight of debt = $825,000 / $6,750,000 = 12.22%

    Number of shares continue to own = 20,000 * (1 - 12.22%) = 17,555.56 or 17,556 shares

    Number of shares continue to own = 17,555.56 or 17,556 shares
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