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:

Natural Resources

Resources that exist without any actions of humankind, obtained from the environment, often used to produce goods and services.

Solar Energy

The energy derived from the sun's rays, which is harnessed and converted into electricity using photovoltaic cells or other technologies.

Forests

Large areas dominated by trees and other vegetation, serving as habitats for various species and playing crucial roles in the earth's ecological balance.

Total Allowable Catch

A fishery management tool that sets a species-specific maximum quantity of fish that can be legally caught and kept over a specified period.