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:

Equity Method

An accounting technique used by companies to assess earnings generated by their investments in other companies, incorporating these earnings as part of their income.

Common Stock

Equity ownership in a corporation, providing voting rights and a share in the company's profits through dividends.

Stockholders' Equity

Stockholders' equity, also known as shareholders' equity, reflects the ownership value remaining in a company after all liabilities are deducted from total assets.