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Part II Question 2. Company A and B differ ONLY in their capital structure. A is financed 20% debt and 80% equity and B is
Part II Question 2. Company A and B differ ONLY in their capital structure. A is financed 20% debt and 80% equity and B is financed 10% debt and 90% equity. The debt of both companies is risk-free. Notations: Firm Value: firm A= firm B=V Profit: firm A= firm B= profit Firm A debt value : D(A) Firm B debt value : D(B) Risk free rate of return : T1 a) Ray owns 10% of the common stock of firm A. What other investment package would produce identical cash flow for Ray? Show the two investment strategies are identical. And discuss why you can construct an investment package with the identical cash flow. (7 points)
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