Use the Information for the Question(s)below

question 32

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 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)$2500
• D)$4000

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Definitions:

Unemployment

The situation of being without a job despite the willingness and capability to work, often measured as a percentage of the labor force.

Inferiority

A feeling of lower status or quality compared to others.

Confidence

The feeling or belief that one can rely on someone or something; self-assurance in one's own abilities or qualities.

Unconditional Regard

An empathetic support and acceptance given to others without any conditions or judgments.