Question
Assume perfect capital markets. Assume that Jonah Corp. has assets that will pay either $210 million or $350 million a year from today. Jonah has
Assume perfect capital markets. Assume that Jonah Corp. has assets that will pay either $210 million or $350 million a year from today. Jonah has outstanding bonds that mature for $200 million a year from today. The value today of Jonah's bonds is $150 million and of Jonah's outstanding stock is $60 million. BlueWater Corp. has assets that are identical to Jonah, but its debt matures for $300 million a year from today. BlueWater's bonds have a value today of $160 million and BlueWater's outstanding stock has a value of $45 million. Create a table that answers the following questions: What set of transactions today will generate an arbitrage profit today? What arbitrage profit will these transactions create today? What cash flows will each of your transactions today create today and a year from today? Note: Answer in millions and use a "+" for inflows and a "-" for outflows. Calculations required.
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