Question
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, VU = VL = $10M.
Suppose VL = $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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Economics For Investment Decision Makers
Authors: Sandeep Singh, Christopher D Piros, Jerald E Pinto
1st Edition
1118111966, 9781118111963
