=2/In a tax-free world, companies B and C are similar in every respect, except their capital structures. B has no debts while C has debts of 24 000 at 5%. The companies have been valued as follows:

Company B Company C Operating income 10 000 10 000 Financial expense 0 1200 Net income 10 000 8800 kE 8% 11%

VE 125 000 80 000 VD 0 24 000 V 125 000 104 000 k 8% 9.62%

VD /(VE + VD) 0% 23%

Payout 100% 100%

You own 1% of company B’s shares. How much will you receive every year? Show how you can increase this amount without altering the amount of your investment or increasing the level of risk.

When will arbitrage cease? What will the P/E be for companies B and C?