Question

Southwest Sands currently has 22,000 shares of stock outstanding. It is considering issuing $128,000 of debt at an interest rate of 7.5 percent. The break-even level of EBIT between these two capital structure options is $74,000. How many shares of stock will be repurchased if the company undergoes the recapitalization? Ignore taxes.

a. 2,446.33 shares
b. 2,242.47 shares
c. 3.091.89 shares
d. 2,854.05 shares
e. 2,711.35 shares

Answer 1

d. 2,854.05 shares

Step-by-step explanation:

$74,000/22,000 = [$74,000 − 128,000(.075)]/X

X = 19,145.94 shares

Shares repurchased = 22,000 − 19,145.94

Shares repurchased = 2,854.05 shares