Use the Information for the Question(s) Below

question 74

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 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) $2,500
• D) $4,000

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Definitions:

Communal Relationships

Relationships based on mutual love and concern, without expectation of repayment.

Exchange Relationships

Social connections where the interactions are based on reciprocal benefits and the expectation of receiving something in return for what is given.

Partners' Needs

The essential emotional, physical, and psychological requirements of one's significant other in a relationship, recognizing and addressing which can enhance mutual satisfaction.

Triangular Theory

A theory proposed by Robert Sternberg, outlining the components of love as intimacy, passion, and commitment.