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Q5Consider two firms, L and U, that have identical assets that generate identical cash flows. Firm U is an all-equity firm, with 1 million shares
Q5Consider two firms, L and 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 $24 per share. Firm L has 2 million shares outstanding and $12 million dollars in debt at an interest rate of 5%. Assume that M&M's perfect capital market conditions are met and that you can borrow and lend at the same 5% rate as firm L. You have $5000 of your own money to invest and you plan on buying firm U's stock. In the following you are interested in using homemade leverage. 1. Determine how much do you need to borrow so that the payoff of your purchase of firm Us stock will be the same as a $5000 investment in firm L's stock? (20 pts.)
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