Consider two? firms, With and? Without, that have identical assets that generate identical cash flows. Without is an allminus−equity ?firm, with 1 million shares outstanding that trade at a price of? $24 per share. With has 2 million shares outstanding and? $12 million of debt at an interest rate of? 5%.
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? $5000 of your own money to invest and you plan on buying With stock. Using homemade? (un)leverage, how much do you need to invest at the riskminus−free rate so that the payoff of your account will be the same as a? $5000 investment in Without? stock?