BNT is a 100% equity financed firm and its asset value is $10m and the company has 10m shares on issue. Bod holds 100 shares in a firm called BNTLEV which holds the same asset as BNT but the company has $5m debt outstanding and 5m shares on issue. Assuming a perfect capital market so that the M&M theory holds. Which of the following will make Bob's position equivalent to a shareholder holding 100 shares in BNT (the unlevered firm)?

Select one:

a.

Bob lends $500 at an interest rate higher than BNTLEV's borrowing rate.

b.

Bob borrows $500 at an interest rate equal to BNTLEV's borrowing rate.

c.

Bob lends $500 at an interest rate equal to BNTLEV's borrowing rate.

d.

Bob borrows $500 at an interest rate lower than BNTLEV's borrowing rate.

e.

Bob purchases 100 shares of BNT without selling the shares of BNTLEV.

Clear my choice