Use the Information for the Question(s) Below

question 22

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, 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 Firm Y stock?

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

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Definitions:

Indorsement

The act of signing the back of a negotiable financial instrument, thereby making it payable to someone other than the named holder.

Signature

A person's name written in a distinctive way as a form of identification in authorizing a document.

Check

A written, dated, and signed instrument that directs a bank to pay a specific sum of money to the bearer or a designated entity from the drawer's account.

Order Paper

A negotiable instrument that is payable to a specific person or their order, requiring endorsement for transfer.