Use the Information for the Question(s) Below

question 14

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 Y stock. Using homemade leverage you borrow enough 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. The number of shares of Firm Y stock you purchased is closest to ________.

• A) 425
• B) 1,650
• C) 2,000
• D) 825

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Definitions:

Freud's

Pertains to Sigmund Freud, the Austrian neurologist who founded psychoanalysis, a method for treating psychopathology through dialogue between a patient and a psychoanalyst.

Unconscious

A part of the mind that houses thoughts, memories, and desires not within conscious awareness but influencing behavior.

Dreams

A series of thoughts, images, and sensations occurring in a person's mind during sleep, often interpreted for psychological significance.

Nature of the Libido

Describes the concept in psychoanalytic theory referring to the energy of the sexual drive as a component of human life instinct.