question archive Consider two firms, Firm L and Firm U, that have identical assets that generate identical cash flows
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Consider two firms, Firm L and Firm U, that have identical assets that generate identical cash flows. Firm U is an all-equity firm, with 1 million shares outstanding that trade for a price of $24 per share. Firm L has 2 million shares outstanding and $12 million in debt at an interest rate of 5%.
Assume that Modigliani and Miller's (1958) perfect capital markets conditions are met and that you can borrow and lend at the same 5% rate as Firm L. You have $5,000 of your own money to invest and you plan on buying Firm U stock. Using homemade leverage, you borrow enough in your margin account so that the payoff of your margin purchase of Firm U stock will be the same as a $5,000 investment in Firm L stock. The number of shares of Firm U stock you purchased is closest to
Select one:
a. 208
b. 21
c. 417
d. 1667
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