"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. "
ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.
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.
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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