14-4 Mrs. Abecrombus has $2,000 to invest in one of two possible investments: a levered firm with a D/E ratio of 1 and a share price of $20, and a risk-free asset with a return of 10%. If Mrs....

14-4

Mrs. Abecrombus has $2,000 to invest in one of two possible investments: a levered firm with a D/E ratio of 1 and a share price of $20, and a risk-free asset with a return of 10%. If Mrs. Abecrombus prefers a D/E ratio of 2, how can she use homemade leverage to achieve her goal?

Select one:

a. Borrow $2,000 at the risk-free rate and buy 200 shares.

b. Borrow $1,000 at the risk-free rate and buy 150 shares.

c. Borrow $1,500 at the risk-free rate and buy 175 shares.

d. Lend $2,000 at the risk-free rate and sell 100 shares.

e. Lend $1,000 at the risk-free rate and sell 50 shares.

Jun 07, 2022

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14-4 Mrs. Abecrombus has $2,000 to invest in one of two possible investments: a levered firm with a D/E ratio of 1 and a share price of $20, and a risk-free asset with a return of 10%. If Mrs....

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