Use the Information for the Question(s) Below

question 79

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 $5,000 of your own money to invest and you plan on buying Firm X 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 Firm Y stock. The number of shares of Firm X stock you purchased is closest to ________.

• A) 100
• B) 417
• C) 1,650
• D) 825

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Definitions:

Elevation

The vertical distance of an object above or below a reference datum (usually mean sea level); generally the height of a ground point above sea level.

Green Mineral Olivine

A common silicate mineral found in the Earth's mantle, recognized by its olive-green color.

Continental Crust

The thick, generally granitic part of the Earth's crust that forms the continents and continental shelves, distinguished from the denser, thinner oceanic crust.

Oceanic Crust

The outermost layer of Earth's lithosphere that lies beneath the oceans, composed mainly of basalt rock formed from volcanic processes at mid-ocean ridges.