Question: You currently own 800 shares of JKL, Inc. JKL is currently an all equity that has 900,000 shares of stock outstanding at a market price of $30 a share. The company's earnings before interest and taxes are $5,400,000.
JKL recently decided to issue $6,750,000 of debt at 5 percent interest. This debt will be used to repurchase shares of stock. Ignore taxes and answer the following two questions:
Part A: What is JKL's target debt to asset ratio? %
Part B: How many shares of JKL stock must you sell to undo the leverage? Assume that you can loan out those funds at 5 percent interest.