U-Meyer and Associates, an online options broker, is an all equity firm with 60,000 shares of stock outstanding at a market price of $50 a share. The company has earnings before interest and taxes of $87,000. U-Meyer and Associates has decided to issue $750,000 of debt at 7.5 percent. The debt will be used to repurchase shares of the outstanding stock.
Currently, you own 500 shares of their stock. How many shares of stock will you continue to own if you unlever this position (that is, undo the capital structure choice of U-Meyer and Associates)? Assume you can loan out funds at 7.5 percent interest. Ignore taxes.