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Shopifeye Inc. is debating whether to convert its all-equity capital structure to one that is 40% debt. There are currently 300,000 shares outstanding and the price per share is $40. EBIT is expected to remain at $650,000 per year forever. The interest rate on new debt is 6% and it is a perfect capital market. A potential shareholder of the firm has $6,000 to invest in the company. Suppose the firm does not convert but she prefers the proposed capital structure with debt.
Question 1: What strategy would she use to achieve her desired cash flows?
Option A) Borrow $10,000 at 6% interest and buy 250 shares in the firm.
Option B) Borrow $4,000 at 6% interest and buy 250 shares in the firm.
Option C) Borrow $4,000 at 6% interest and buy 100 shares in the firm.
Option D) Borrow $6,000 at 6% interest and buy 150 shares in the firm.
Option E) None of the above.
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