Question 10 1 pts Assume that MM's perfect capital market conditions are met except for agency conflicts between managers and shareholders. Consider two firms, Firm X and Firm Y, which have identical assets that generate identical cash flows. Both firms have $1,000 in cash today and are expected to generate a free cash flow of $1,100 next year. They are closing their operations afterward. Managers of both firms hope to use the cash ($1,000) to expand the firm's operations, which will, in turn, increase future free cash flows to $2,100. The decision to expand requires more than 50% votes (approval) from equity holders in a shareholders meeting. Both firms' overall cost of capital is 10%. Firm X is an unlevered firm and has 100 equity shares (each worth $20 today). Firm Y has 100 equity shares (each worth $10 today) and $1000 in debt. You are a large shareholder of both firms. You own $600 worth of Firm X's equity and $600 worth of Firm Y's equity today, and you disagree with the management's expansion decisions. You know that other investors will always agree with the management's decisions in shareholders' meetings (for some reason). Can the managers of Firm X and Firm Y expand their operations as they hoped? (Hint: Think about % of equity shares you own for Firm X and Firm Y. Do you have enough equity shares to veto the managers' plan?) Discuss the role of debt on equity ownership structures and monitoring. (Hint: Think about % of equity shares you own in the two cases with the same amount of money. How does debt change the equity ownership structure?)