Consider two firms, Firm A and B that have identical assets that generate identical cash flows Firm B an all-equity firm, with 1million shares outstanding that trade for a price of $30 per share. Firm A has 2 million shares outstanding AND $12 million dollars in debt at an interest rate of 5%.

Assume that MMs perfect capital market conditions are met and that you can borrow and lend at the same 5% rate as a firm A. you have $6,000 of your own money to invest and you plan on buying firm B stock. Using homemade leverage, how much do you need to borrow in your margin account so that the payoff if your margined purchase of firm B stock will be the same as a $6000 investment in Firm A stock?

$2,500

$4,000

$5,000

$0