Parker & Thomas, Inc

Multiple Choice

Parker & Thomas, Inc., (P&T) currently is an all equity firm with 20,000 shares of stock outstanding at a market price of $40 a share. The company's earnings before interest and taxes are $50,000. The firm's dividend payout ratio is 100%. P&T has decided to add leverage to its financial operations by issuing $400,000 of debt at a 9% interest rate. This $400,000 will be used to repurchase shares of stock. You own 2,500 shares of P&T stock. You lend funds at a 9% rate of interest. How many of your shares of stock in P&T must you sell to offset the leverage that the firm is assuming? Assume that you loan out all of the funds you receive from the sale of your stock.

A) 500 shares
B) 750 shares
C) 1,000 shares
D) 1,250 shares
E) 1,500 shares