Question

Kurz manufacturing is currently an all-equity firm with 15 million shares outstanding and a stock price of 14.00 per share. Although investors currently expect Kurz to remain an all-equity firm, Kurz plans to announce that it will borrow 57 million and use the funds to repurchase _________. Kurz will pay interest only on this debt, and it has no further plans to increase or decrease the amount of debt. Kurz is subject to a 25

1) additional shares
2) assets
3) liabilities
4) equity

Answer 1

Kurz Manufacturing intends to borrow $57 million to repurchase a portion of its shares, creating liabilities due to the required interest payments.

Step-by-step explanation:

Kurz Manufacturing is currently an all-equity firm but plans to adjust its capital structure by borrowing to repurchase some of its own shares. By doing so, Kurz will have liabilities in the form of debt. The company plans to use the $57 million it intends to borrow for the repurchase of its shares. The procurement of debt will require Kurz to make consistent interest payments regardless of its earnings. This decision contrasts with issuing more shares, where the company would not be obligated to make such payments. Kurz's announcement to borrow implies a leverage strategy to buy back equity, enhancing its capital structure and possibly increasing shareholder value.