5. Capital Structure (15 marks) The Starsky Company and the Hutch Company are identical in every respect except that Starsky is not levered. The market value of Hutch Company's 8 percent bonds is $1.5 million. Financial information for the two firms appears here. All earning streams are perpetuities. Neither firm pays taxes. Both firms distribute all earnings available to common stockholders immediately. Starsky $1,160,000 Projected operating income Year-end interest on debt Market value of stock Market value of debt Hutch $1,160,000 $120,000 $8,000,000 $1,500,000 $9,000,000 a. An investor who can borrow at 8 percent per year wishes to purchase 10 percent of Hutch's equity. Can she increase her dollar return by purchasing 10 percent of Starsky's equity if she borrows so that the initial net costs of the two strategies are the same (10 marks) b. Given the new investment strategies in (a), which will investors choose? When will the process cease