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Arbitrage : The Bharat company & the Charat company belongs to the same risk class - these companies are identical in all respects except that

Arbitrage : The Bharat company & the Charat company belongs to the same risk class - these companies are identical in all respects except that the Bharat company has no debt in its capital structure, where as the Charat company employs debt in its capital structure. Relevant financial particulars of two companies are attached as "Attachment A"

a) You own 10,000 worth of Charat's equity. Show what Arbitrage you would resort to.

b) When will, according to Modigliani & Miller, this arbitrage cease?

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