Every student loves the Nobel-prize-winning theory of capital structure irrelevance in a world of perfect competition without taxes or private information (and no transactions costs), formulated by Modigliani and Miller, or M&M for short. Suppose there are no personal or corporate taxes and no transactions costs nor private information. In this perfect world, the Baby Bob Company and the Arctic Apple Corporation are identical in all respects, except that Baby Bob is unlevered and Arctic Apple has $5,000,000 of 5% bonds outstanding. Assume that EBIT is $1,000,000 for both, and that the cost of equity of Baby Bob is 10% and the cost of equity of Arctic Apple is 15%. Next assume that VBabyBob = $10,000,000 and VArcticApple = $11,000,000. Using the M&M propositions, demonstrate how to make a riskless profit without investing a penny of ones own wealth.

Please give calculations Part B: (10 marks) Explain how personal taxation