Firms X and Y are identical in all respects except for capital structure. These firms operate in a tax-exempt haven where firms and individuals pay no taxes at all. Current data on the financial structure of the two firms is as follows:

Firm X: 1,000 shares outstanding, current market price of $10 per share

100 bonds outstanding with a current bond price of $100 per bond

Firm Y: 2,000 shares outstanding, current market price of $9 per share

50 bonds outstanding with a current bond price of $100 per bond

The bonds in both firms are risk free and they are zero-coupon bonds that will pay the holder principal and interest one year from today. The risk-free interest rate is 10%. An individual investor can also borrow or lend from a bank at the 10% risk-free rate.

Construct an arbitrage portfolio that includes exactly 100 shares of stock in firm X. How large are the arbitrage profits from this portfolio?[Hint: consider the value of unlevered ve rsions of firm X and firm Y a nd identify a percent of the unlevered versions of these firms in which you go long one and short the other in the same percentages so as to ge nerate a sure profit.]