Question
Select the correct answer for the following question and enter it into the answering space below: Moderna Co. and Pfizer Co. are identical firms in
Select the correct answer for the following question and enter it into the answering space below:
Moderna Co. and Pfizer Co. are identical firms in all respects except for their capital structures. Moderna is all equity financed with $500,000 in stock. Pfizer uses both stock and debt; its stock is worth $200,000 and the interest rate on its debt is 6 percent. Both firms expect EBIT to be $60,000. Ignore taxes. An individual investor, Tom, owns $10,000 worth of Pfizers stock. Tom could generate exactly the same cash flows and rate of return for his investment in Pfizer Co. by selling his Pfizer shares (for $10,000 in cash) and investing in Moderna using the following strategy:
A. Invest $10,000 in Moderna stock funded by his own cash of $10,000.
B. Invest $20,000 in Moderna stock funded by his own cash of $10,000 and debt of $10,000.
C. Invest $15,000 in Moderna stock funded by his own cash of $10,000 and debt of $5,000.
D. Invest $25,000 in Moderna stock funded by his own cash of $10,000 and debt of $15,000.
E. None of the above.
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