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:

Unearned Rent

Income received for rent that has yet to be earned, typically because the service period has not yet been completed; it is recorded as a liability.

Adjusting Entry

Journal entries made in an accounting period's end to allocate revenues and expenses to the period in which they actually occurred.

Rent Receivable

An account in the balance sheet that represents the amount of rental payments owed to a property owner but not yet received.

Adjusting Entry

A journal entry made in the accounting records at the end of an accounting period to allocate income and expenditure to the appropriate period.