Use the Information for the Question(s) Below

question 22

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 X 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 $5,000 investment in Firm Y stock?

• A) $5,000
• B) $0
• C) $2,500
• D) $4,000

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Definitions:

Oral Stage

The first stage in Freud's psychosexual development theory, occurring from birth to 18 months, where the infant's pleasure centers on oral activities like sucking.

Weaned

The process of gradually introducing an infant mammal to adult food while ceasing the feeding of mother's milk.

Baby

A very young child, especially one newly or recently born.

Freudian Theory

A set of psychoanalytic theories developed by Sigmund Freud, emphasizing unconscious motives and conflicts as forces that influence behavior.