Question

# "You have \$5,000, which you want to invest in shares of firm A. The firm has...

"You have \$5,000, which you want to invest in shares of firm A. The firm has no debt but you prefer 50% debt. If the stock price is \$50 per share, how can you create your homemade leverage?"

 Buy 50 shares with your own money and lend \$2500. "Invest \$2,500 in stocks of firm A and \$2,500 in its bonds. " "Invest \$5,000 in bonds of firm A. " "Borrow \$5,000 and invest in 200 shares of firm A. "

You wish to have a 50% debt in your Investment.

Debt is a liability.

You have \$5000 in cash.

You can Borrow(liability) upto \$5000 to create a 50% debt (5000)/(5000+5000)

You have total cash of \$10,000 (including borrowed money).

Each share is \$50.

You can invest in 10,000/50 = 200 shares of Firm A.

Answer: D. Borrow \$5,000 and invest in 200 shares of firm A.

Incorrect Explaination:

A- is incorrect, if you lend money then its an asset and not a liability.

B - \$2500 in bonds still is an asset, as it's your own money.

C- \$5000 in bonds still is an asset, as it's your own money.

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