Use the Information for the Question(s)below

question 62

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 With shares. 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 Without shares?

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

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Definitions:

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