1. Please fill the blanks in the following table with available information

Homemade leverage: An investor can trade up to $1,000 to buy stock shares. The investor like to have the stock performance of the levered firm. However, the levered firm is privately held with no shares available to buy for the investor. The Unlevered firm is a public-listed company with shares available for purchase.

• How could the investor produce a home-made leverage, by trading the unlevered shares? Assuming no tax, and investor borrowing and firm borrowing at the same interest rate of 10%.

• How many shares does the investor need to trade?

• Should the investor _____ (borrow or lend) money? If yes, by how much?

• What is the investors annual interest in $ for the loan?

• How much does the investor earn from his/her stock holding?

What is the ROE for the investor (Overall Cash Flow/ Investor own money)?

40 Total Assets Total Debt Total Equity Price per Share Shares outstanding EBIT Interest Expense Net Income Earnings Per Share Return on Equity Debt Ratio Unlevered Firm Levered Firm Notes 2000 2000 0 800 2000 1200 50 50 24 400 400 Interest rate of debt is 10% Assuming no tax EPS=Net Income/ Shares outstanding ROE= Net Income / Total Equity Debt ratio=total debt/ total assets