● 14. B Ltd. and C Ltd. belong to the same risk class. Two companies are identical in all respect except that C Ltd. has no Debt Capital in its Capital Structure, whereas B Ltd. employs debt in its Capital Structure. Relevant financial particulars of the two companies are given as follows:

Particulars B Ltd. C Ltd.

Net operating income Debt interest Equity Capitalisation rate Debt Capitalisation rate

`10,00,000

`4,00,000 14%

8%

`10,00,000 Nil 12%

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(a) You own `10,000 worth of equity of B Ltd. Show what arbitrage you would resort to.

(b) When will this arbitrage cease according to Miller and Modigliani?