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Assume that Arthur Corp. and Dutch Inc. have identical assets that will pay off either $80 million, $100 million or $150 million a year from

Assume that Arthur Corp. and Dutch Inc. have identical assets that will pay off either $80 million, $100 million or $150 million a year from today. Arthur is funded with bonds that mature for $75 million one year from today and with equity, but Dutch is funded with bonds that mature for $90 million one year from today and with equity. The market value of Arthur bonds is $55 million and of its equity is $43 million, and the market value of Dutch bonds is $83 million and of its equity is $16 million. If markets are perfect, what set of transactions today will generate an arbitrage profit for you? Show that the conditions of arbitrage are met regardless of whether the firms assets end up begin worth $80 million, $100 million or $150 million.

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