10. Company A, a levered company and company B, an unlevered are identical in every respect except that Company A has 6% US. 200,000 debt outstanding. Michael Jordan holds US. 2,000 worth of the Company A shares. As per the income (NI) approach, the valuation of the two firm is provided below:

Company A USD	Company B USD
Net operating income (NOI) 60,000 Less: total cost of debt-------------------- 12,000 Net earnings ------------------------------ 48,000 Equity capitalization rate ---------------- 0.111 Market value of shares ------------------ 432,000 Market value of debt -------------------- 200,000 Total value of the firm ------------------ 632,000	60,000 0 60,000 0.100 600,000 0 600,00

Required:

Demonstrate how Michael Jordan will reduce his outlay to earn the same return through the use of

Arbitrage.