Answer:
The correct option is d. sell 250 shares and loan out the proceeds at 8%
Step-by-step explanation:
Based on the information given in a situation where you prefer the original capital structure of 100% equity as well as the associated payoffs,
the actions to achieve the ORIGINAL PAYOFFS
under 100% equity will be to SELL 250 shares and LOAN out the proceeds at 8% reason been if the proceeds of 8% is loan out it will be used to repurchase shares of stock.
CALCULATION for the 250 shares which is the number of shares sold
First step is to calculate Your initial investment
Your initial investment = 1,000 sharesx $50 per share
Your initial investment= $50,000
Second step is to calculate JKL value of stock
JKL value of stock = [80,000 - ($1M/$50 per share)] x $50 per share
JKL value of stock =(80,000-20,000)×$50 per share
JKL value of stock =60,000×$50 per share
JKL value of stock = $3M
Third step is to calculate JKL Total value
JKL Total value = 3M + 1M
JKL Total value = 4M
Fourth step is to find JKL Wight Stock using this formula
JKL Wight Stock=JKL value of stock/JKL Total value
Let plug in the formula
JKL Wight Stock = 3M/4M
Fifth Step is to calculate You new stock position
You new stock position =[ 3M/4M($50,000) ]/$50 share
You new stock position = $37,500/50 per shares
You new stock position = 750
Last step is to calculate the Number shares sold
Number shares sold = 1,000 shares - 750
Number shares sold = 250 shares