Use the Information for the Question(s)below

question 84

Multiple Choice

Use the information for the question(s) below.
Consider two firms,With and Without,that have identical assets that generate identical cash flows.Without is an all-equity firm,with 1 million shares outstanding that trade for a price of $24 per share.With has 2 million shares outstanding and $12 million in debt at an interest rate of 5%.
-Assume that MM's perfect capital market conditions are met and that you can borrow and lend at the same 5% rate as With.You have $5000 of your own money to invest and you plan on buying Without stock.Using homemade leverage,you borrow enough in your margin account so that the payoff of your margined purchase of Without stock will be the same as a $5000 investment in With stock.The number of shares of Without stock you purchased is closest to:

• A)425.
• B)1650.
• C)2000.
• D)825.

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Definitions:

Weighted Average Cost

The total cost of goods available for sale divided by the number of goods available for sale, giving each item a weight proportional to its cost.

Cost of Equity

The return a firm theoretically pays to its equity investors, i.e., shareholders, to compensate them for the risk of investing in the company.

Pre-tax Cost

The cost of an investment or expense before the application of taxes, representing the gross expense.

Market Price

The rate at present for the purchase or sale of a service or asset.