2. Homemade leverage (S16-2) Companies A and B differ only in their capital structure. A is financed 30% debt and 70% equity; B is financed 10% debt and 90% equity. The debt of both companies is risk-free.

a. Rosencrantz owns 1% of the common stock of A. What other investment package would produce identical cash flows for Rosencrantz?

b. Guildenstern owns 2% of the common stock of B. What other investment package would produce identical cash flows for Guildenstern?

c. Show that neither Rosencrantz nor Guildenstern would invest in the common stock of B if the total value of company A were less than that of B.