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You are an investor in Borrowhappy Ltd., which has a debt-equity ratio of 3:1. Though you have had a good experience thus far, you are influenced by an expert’s advise published in media and decide to move your investment to a firm called Equitysafe Inc. which is completely equity financed but otherwise similar as far as its earning power is concerned. You will do this by selling off your shares worth $35,000 and use the sales proceeds to partly finance your share purchase in the new firm. If you wish to retain the same earnings that you enjoyed with Borrowhappy Ltd. how many dollars worth of shares you will need to buy in Equitysafe Inc.? Assume both firms follow a 100% dividend payout policy and there are no taxes.

a.

$105,000

b.

$35,000

c.

$140,000

d.

$70,000

e.

Insufficient information to compute

please assist

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