Question

John invested in North Point stock when the firm was unlevered. After that, North Point has changed its capital structure. The firm now has a debt ratio of.35. To unlever his position, John has to Multiple Choice o borrow some money and purchase additional shares of North Point stock borrow some m o C ) maintain his current equity position as the debt of the firm does not affect him personally o sell 35 percent of his shares of North Point stock and hold the proceeds in cash o sell 35 percent of his shares of North Point stock and loan out the sale proceeds o o create a personal debt-equity ratio of 35

Answer 1

1. option D

SELL 35% OF SHARES OF NORTH POINT STOCK AND LOAN OUT THE PROCEEDS.

2. option A

WACC DECREASES AS THE DEBT TO EQUITY RATIO INCREASES.

3. option D

THE VALUE OF A TAXABLE COMPANY INCREASES AS THE LEVEL OF DEBT INCREASES.