Problem:
River Cruises is allequityfinanced with 50,000 shares. It now proposes to issue $250,000 of bonds and use the proceeds to repurchase 25,000 shares. Suppose an investor currently holds 500 shares in the company but is unhappy with its decision to borrow $250,000.
Required:
Which of the following modifications to her own investment portfolio would offset the effects of the firm's additional borrowing? Explain
a. Borrow $250 on her own account and use the cash to buy additional River Cruises' shares.
b. Raise $250 by selling River Cruises' shares and use the cash to buy the company's debt.
c. Keep her current holding of River Cruises' shares and borrow $250 to invest in the company's bond issue.
Note: Be sure to show how you arrived at your answer.