Use the Information for the Question(s) Below

question 84

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 Without stock.Using homemade leverage,how much do you need to borrow in your margin account so that the payoff of your margined purchase of Without stock will be the same as a $5,000 investment in With stock?

• A) $10,000
• B) $5,000
• C) $2,500
• D) $0

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Definitions:

Federal Government

The national government of a federated state, which holds the authority to govern based on a division of powers between national and subnational governments.

Consolidated Omnibus Budget Reconciliation Act

A federal law in the United States that, among other things, provides individuals and their families the option to continue healthcare coverage when it would otherwise be lost due to certain life events.

Emergency Medical Treatment

The immediate assessment and intervention provided to individuals with acute illness or injury, typically delivered by first responders, emergency medical technicians, or hospital emergency departments.

Active Labor Act

Known as the Emergency Medical Treatment and Active Labor Act (EMTALA), a U.S. federal law that mandates emergency healthcare services to be provided irrespective of the patient's ability to pay.