Consider two firms, with and without that have identical assets that generate identical cash flows. Without is an all equity firm with 1 million shares outstanding that trade at a price of $24 per share. With has 2 million shares outstanding and 12 million of debt at an interest rate of 5%.

Assume that MMs perfect capital markets conditions are met and that you can borrow and lend the same 5% rate as with. You have 5000 of your own money to invest and plan on buying without stock. Using homemade leverage how much do you need to borrow in your margin account so that the payoff of your margined purchase of without stock will be the same as $5000 investment with stock