Suppose there are no taxes. Firm ABC has no debt, and firm XYZ has debt of $5,000 on which it pays interest of 10% each year. Both companies have identical projects that generate free cash flows of $800 or $1,000 each year. After paying any interest on debt, both companies use all remaining free cash flows to pay dividends each year.

a. Suppose you hold 10% of the equity of ABC. What is another portfolio you could hold that would provide the same cash flows?

Question format: You can (Buy/sell) ____% of (ABC/XYZ) debt, and

You can (Buy/Sell) ____ % of (ABC/XYZ) equity.

b. Suppose you hold 10% of the equity of XYZ. If you can borrow at 10%, what is an alternative strategy that would provide the same cash flow?

Question format: Same format as a.)