Use the Information for the Question(s)below

question 10

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 one million shares outstanding that trade for a price of $24 per share. With has two 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 $5 000 of your own money to invest and you plan on buying Without shares. Using homemade leverage you borrow enough in your margin account so that the payoff of your margined purchase of Without shares will be the same as a $5 000 investment in With shares. The number of shares of Without you purchased is closest to:

• A)2 000
• B)1 650
• C)425
• D)825

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