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Capital Structure

Claudia invested in ABC's stock when the firm was financed solely with equity. The firm is now utilizing debt in its capital structure. To unlever her position, Claudia needs to:

A. borrow some money and purchase additional shares of ABC stock.
B. maintain her current position as the debt of the firm did not affect her personal leverage position.
C. sell some shares of ABC stock and hold the proceeds in cash.
D. sell some shares of ABC stock and loan it out such that she creates a personal debt-equity ratio equal to that of the firm.
E. create a personal debt-equity ratio that is equal to exactly 50% of the debt-equity ratio of the firm.

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The answer is
D. sell some shares of ABC stock and loan it out such that she creates a personal debt-equity ratio equal to ...

Solution Summary

The solution explains the use of homemade leverage when a firm changes its capital structure

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