Consider Figure 4a (in and around p.273)(See pictures attached) with the title Financial Market and Product Market equilibrium for Debt and Equity financed Firms: Expansion. Now suppose the firm chooses to get back in equilibrium by reducing investment in productive capital to get back to stock market equilibrium and then increases financial leverage to get back into debt market equilibrium. Redraw Figure 4a and then starting from z and trace out in the figure these two steps. What is happening to arbitrage profits when the firm adjusts investment and financing decisions in this way?

Figure 4a: Financial Market and Product Market Equilibrium for Debt and Equity Financed Firms: Expansion ale K(b)/K(s) 271 Figure 4a: Financial Market and Product Market Equilibrium for Debt and Equity Financed Firms: Expansion ale K(b)/K(s) 271