Use the Information for the Question(s) Below

question 89

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 $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:

Straight-line Depreciation

A method of allocating the cost of a tangible fixed asset over its useful life in equal annual installments.

Net Income

The total profit of a company after all expenses and taxes have been deducted from total revenue.

Average Accounting Return

The ratio of the average net income that an investment generates to the average book value of the investment over its life.

Salvage Value

The estimated residual value of an asset after it has been fully depreciated and is no longer in use.