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 $25 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. 200

b. 1538

c. 400

d. 20