Use the Information for the Question(s) Below

question 14

Multiple Choice

Use the information for the question(s) below.
Consider two firms, Firm X and Firm Y, that have identical assets that generate identical cash flows. Firm Y is an all-equity firm, with 1 million shares outstanding that trade for a price of $24 per share. Firm X has 2 million shares outstanding and $12 million 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 Firm X. You have $5,000 of your own money to invest and you plan on buying Firm Y stock. Using homemade leverage you borrow enough in your margin account so that the payoff of your margined purchase of Firm Y stock will be the same as a $5,000 investment in Firm X stock. The number of shares of Firm Y stock you purchased is closest to ________.

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

---

Definitions:

Reciprocity

A social norm of responding to a positive action with another positive action, fostering mutual benefit and cooperation.

Intergroup Conflict

A situation where members of different groups experience friction, opposition, or even hostility, often fueled by competition for resources or differences in values.

Theories

Systematically organized principles designed to explain and predict phenomena, based on observation, experimentation, and reasoning.

Stereotypes

Oversimplified and widely held beliefs or opinions about the characteristics, attributes, and behaviors of members of a particular group.