Assume markets are "perfect" as described in Chapter 17. Firm U and Firm L have the exact same assets (managed in exactly the same way). Firm U has no debt. The market value of Firm U's equity is $7500. Firm L has risk-free perpetual debt with a market value of $3000 and equity with a market value of $5000. Therefore, the market values of Firm U and Firm Lare $7500 and $8000 respectively. Since these two firms do not have the same market value, you should be able to earn a true arbitrage. What are the three positions you need to take at time zero to earn a true arbitrage profit? (Use the procedures we discussed in class. Also, as in class, assume alpha = 10%. You must get all three answers correct to get credit.) Pick one A. Sell short $300 of Firm Lequity B. Sell short $500 of Firm L equity C. Sell short $750 of Firm U equity Enter the letter (A, B, or C) for the correct answer in the box here: B Pick one D. Invest $500 into the debt of Firm L E. Invest $300 into the debt of Firm L F. Borrow $300 Enter the letter (D, E, or F) for the correct answer in the box here: E Pick one G. Invest $800 into the equity of Firm U H. Invest $750 into the equity of Firm U I. Invest $400 into the eauity of Firm L Pick one G. Invest $800 into the equity of Firm U H. Invest $750 into the equity of Firm U 1. Invest $400 into the equity of Firm L J. Invest $500 into the equity of Firm L Enter the letter (G, H, I, or J) for the correct answer in the box here: Assume markets are "perfect" as described in Chapter 17. Firm U and Firm L have the exact same assets (managed in exactly the same way). Firm U has no debt. The market value of Firm U's equity is $7500. Firm L has risk-free perpetual debt with a market value of $3000 and equity with a market value of $5000. Therefore, the market values of Firm U and Firm Lare $7500 and $8000 respectively. Since these two firms do not have the same market value, you should be able to earn a true arbitrage. What are the three positions you need to take at time zero to earn a true arbitrage profit? (Use the procedures we discussed in class. Also, as in class, assume alpha = 10%. You must get all three answers correct to get credit.) Pick one A. Sell short $300 of Firm Lequity B. Sell short $500 of Firm L equity C. Sell short $750 of Firm U equity Enter the letter (A, B, or C) for the correct answer in the box here: B Pick one D. Invest $500 into the debt of Firm L E. Invest $300 into the debt of Firm L F. Borrow $300 Enter the letter (D, E, or F) for the correct answer in the box here: E Pick one G. Invest $800 into the equity of Firm U H. Invest $750 into the equity of Firm U I. Invest $400 into the eauity of Firm L Pick one G. Invest $800 into the equity of Firm U H. Invest $750 into the equity of Firm U 1. Invest $400 into the equity of Firm L J. Invest $500 into the equity of Firm L Enter the letter (G, H, I, or J) for the correct answer in the box here
