Problem 4(5 points): Consider two firms, With and Without, that have identical assets that generate identical cash flows. Without is an all-equity firm, with 1 million shares outstanding that trade for a price of $24 per share. With has 2 million shares outstanding and $12 million dollars in debt at an interest rate of 5%. Write down your explanation for each question! You will receive zero point if you get the right answer without the correct explanation a) According to MM Proposition 1, the stock price for With is closest to: A) $8.00 B) $24 00 C) $6.00 D) S12.00 Answer Explanation: b) Assume that MM's perfect capital markets conditions are met and that you can borrow and lend at the same 5% rate as with. You have $5,000 of your own money to invest and you plan on buying Without stock. Using homemade leverage, how much do you need to borrow in your margin account so that the payoff of your margined purchase of Without stock will be the same as a $5,000 investment in With stock? A) $10,000 B) $5,000 C) $2,500 D) $O Answer Explanation: e) Assume that MM's perfect capital markets conditions are met and that you can borrow and lend at the same 5% rate as with You have $5,000 of your own money to invest and you plan on buying Without stock. Using homemade leverage you borrow enough in your margin account so that the payoff of your margined purchase of Without stock will be the same as a $5,000 investment in With stock. The number of shares of Without stock you purchased is closest to: A) 425 B) 1,650 C) 2,000 D) 825 Answer Explanation