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5. Assume markets are perfect as described in Chapter 17. You have $120 to invest. Firm U is an unlevered firm. The market value of
5. Assume markets are perfect as described in Chapter 17. You have $120 to invest. Firm U is an unlevered firm. The market value of Firm U's equity is $1000. Firm Lis a levered firm. The market value of Firm L's debt and equity are $415 and $585 respectively. (As in class, the debt of Firm L is risk free, permanent, and perpetual.) Firm U and Firm L have the exact same assets, managed in exactly the same way. How can you purchase Firm U equity (i.e., the unlevered firm) and make it look like an investment in Firm Lequity (i.e., the levered firm)? (Use the Chapter 17 perfect capital market assumptions. Thus, when you borrow or lend money, you get the same interest rate and same terms as the debt of Firm L.) A. Take your $120, borrow an additional $64.615, and buy $184.615 of the equity of Firm U. B. Take your $120, borrow an additional $70.476, and buy $190.476 of the equity of Firm U. C. Take your $120, borrow an additional $78.347, and buy $198.347 of the equity of Firm U. D. Take your $120, borrow an additional $85.128, and buy $205.128 of the equity of Firm U. E. Take your $120 and invest $42.0 in debt and $78.0 in the equity of Firm U. F. Take your $120 and invest $44.4 in debt and $75.6 in the equity of Firm U. G. Take your $120 and invest $47.4 in debt and $72.6 in the equity of Firm U. H. Take your $120 and invest $49.8 in debt and $70.2 in the equity of Firm U
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