Modigliani & Miller Propositions NoLeverage is a firm financed entirely with equity and Leverage is a firm financed with $50-50$ equity and debt, but otherwise the two firms are identical. Both firms have an annual EBIT of $$4$ million and operate in a perfect capital market Also, for both firms the required return on assets, $r_A,$ is $7\mathrm{.}5\%$ and the risk$-$free rate is $5\mathrm{.}0\%.$

a$.$ For both firms calculate the total firm value, market value of debt and equity, and required return on equity

b$.$ Recalculate the values in part a assuming that the market mistakenly requires a return on equity of $12\%$ for Leverage

c$.$ Explain how arbitrage traders will force Leverage firm's value into equilibrium.

a$.$ The total firm value of NoLeverage is $ $($Round to the nearest dollar.$)$