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Company U and L are identical except that U is unlevered while L has $3M of 6% bonds outstanding, and the EBIT is $1M. The

Company U and L are identical except that U is unlevered while L has $3M of 6% bonds outstanding, and the EBIT is $1M. The cost of equity to firm U is 10%. According to MM theory with no tax, V_U = V_L = $10M.

Suppose V_L = $12M, you can engage in the arbitrage process to earn the arbitrage profit.

If you own 10% of L's equity, what will be the arbitrage profit?

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