Use the Information for the Question(s)below

question 45

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 With stock.Using homemade (un) leverage,how much do you need to invest at the risk-free rate so that the payoff of your account will be the same as a $5000 investment in Without stock?

• A)$5000
• B)$0
• C)$2500
• D)$4000

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Definitions:

Linear Supply and Demand Curves

Graphical models where the supply and demand for a good are represented by straight lines, indicating a constant relationship between quantity supplied/demanded and price.

Parameters

Specific characteristics or constants that define or limit the operation of a system, model, or function.

Market for Coffee

The global or local marketplace where coffee, as a commodity, is traded, including its production, distribution, and consumption.

Long Run

Refers to a period in which all factors of production and costs are variable, allowing firms to adjust all inputs.