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1.Suppose there are two firms, each with time period 1 cash flows of $1400 or $900 as shown below: Time period 0 -$800 Time period
1.Suppose there are two firms, each with time period 1 cash flows of $1400 or $900 as shown below:
Time period 0
-$800
Time period 1
Strong Economy: $1400
Weak Economy: $900
The firms are identical except for their capital structure. One firm is unlevered and its equity has a market value og $990. The other firm has borrowed $500, and its equity has a market value of $510. Does MM proposition 1 hold? What arbitrage opportunity is available using homemade leverage?
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