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Correct answer is G. Please explain how to solve. 6. You have $165 to invest. Firm U is an unlevered firm. The market value of
Correct answer is G. Please explain how to solve. 6. You have $165 to invest. Firm U is an unlevered firm. The market value of Firm U's equity is $1000. Firm L is 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.)
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