Use the Information for the Question(s) Below

question 50

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 $5,000 of your own money to invest and you plan on buying With stock.Using homemade (un) leverage you invest enough at the risk-free rate so that the payoff of your account will be the same as a $5,000 investment in Without stock.The number of shares of With stock you purchased is closest to:

• A) 100
• B) 425
• C) 1,650
• D) 825

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Definitions:

Population Regression Line

The line that best describes the relationship between an independent variable and a dependent variable for the entire population.

Population Coefficient

A parameter that quantifies a certain characteristic or attribute of a population.

Correlation

A statistical measurement of the relationship between two variables, indicating how one may predict the other.

Coefficient of Determination

Denoted as R-squared, it measures the proportion of the variance in the dependent variable that is predictable from the independent variable(s) in a regression model.