Use the Information for the Question(s) Below

question 14

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 dollars in debt at an interest rate of 5%.
-Assume that MM's perfect capital markets conditions are met and that you can borrow and lend at the same 5% rate as With.You have $5,000 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 $5,000 investment in With stock.The number of shares of Without stock you purchased is closest to:

• A) 425
• B) 1,650
• C) 2,000
• D) 825

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Definitions:

Exercise Value

The value of an option if it were exercised immediately, typically the difference between the underlying asset's market price and the option's strike price.

Time Value

The concept that money available in the present is worth more than the same amount in the future due to its potential earning capacity.

Market Value

The ongoing price for buying or selling a service or asset on the open market.

Equilibrium

Equilibrium refers to a state in which market supply and demand balance each other, and as a result, prices become stable.