Correct answer is D. Please explain how to solve.
Correct answer is G. Please explain how to solve.
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 Lis 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. 6. You have $165 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 $375 and $625 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 L equity (i.e., the levered firm) and make it look like an investment in Firm U equity (i.e., the unlevered firm)? (Use the Chapter 17 "perfect 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. B. C. D. Uowu I Take your $165, borrow an additional $55.000, and buy $220.000 of the equity of Firm L (the levered firm). Take your $165, borrow an additional $85.000, and buy $250.000 of the equity of Firm L (the levered firm). Take your $165, borrow an additional $99.000, and buy $264.000 of the equity of Firm L (the levered firm). Take your $165, borrow an additional $110.000, and buy $275.000 of the equity of Firm L (the levered firm). Take your $165 and invest $41.250 in debt and $123.750 in the equity of Firm L (the levered firm). Take your $165 and invest $56.100 in debt and $108.900 in the equity of Firm L (the levered firm). Take your $165 and invest $61.875 in debt and $103.125 in the equity of Firm L (the levered firm). Take your $165 and invest $66.000 in debt and $99.000 in the equity of Firm L (the levered firm). E. F. G. H. 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 Lis 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. 6. You have $165 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 $375 and $625 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 L equity (i.e., the levered firm) and make it look like an investment in Firm U equity (i.e., the unlevered firm)? (Use the Chapter 17 "perfect 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. B. C. D. Uowu I Take your $165, borrow an additional $55.000, and buy $220.000 of the equity of Firm L (the levered firm). Take your $165, borrow an additional $85.000, and buy $250.000 of the equity of Firm L (the levered firm). Take your $165, borrow an additional $99.000, and buy $264.000 of the equity of Firm L (the levered firm). Take your $165, borrow an additional $110.000, and buy $275.000 of the equity of Firm L (the levered firm). Take your $165 and invest $41.250 in debt and $123.750 in the equity of Firm L (the levered firm). Take your $165 and invest $56.100 in debt and $108.900 in the equity of Firm L (the levered firm). Take your $165 and invest $61.875 in debt and $103.125 in the equity of Firm L (the levered firm). Take your $165 and invest $66.000 in debt and $99.000 in the equity of Firm L (the levered firm). E. F. G. H
