Use the Information for the Question(s) Below

question 69

Multiple Choice

Use the information for the question(s) below.
Consider two firms, Firm X and Firm Y, that have identical assets that generate identical cash flows. Firm Y is an all-equity firm, with 1 million shares outstanding that trade for a price of $24 per share. Firm X 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 Firm X. You have $5000 of your own money to invest and you plan on buying Firm Y stock. Using homemade leverage, how much do you need to borrow in your margin account so that the payoff of your margined purchase of Firm Y stock will be the same as a $5,000 investment in Firm X stock?

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

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Definitions:

Economic Stabilization

Actions by governments or central banks to maintain economic growth, control inflation, and reduce unemployment.

Keynesian Economics

An economic theory that advocates for active government intervention in the marketplace and monetary policy to stabilize economic fluctuations and boost demand.

Monetary Rule

A principle or guideline used by central banks to determine the amount of money supply growth necessary to influence interest rates and control inflation.

Price Stability

A situation in which prices in the economy do not change significantly in the short term and low inflation rates are maintained.