Question

"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 1

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.

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.