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. In the table below, fill in the debt payments and equity dividends each firm will receive given each of the two possible levels of free cash flows.

b. Suppose you hold

10%

of the equity of ABC. What is another portfolio you could hold that would provide the same cash flows? c. 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 flows?

a. In the table below, fill in the payments debt and equity holders of each firm will receive given each of the two possible levels of free cash flows. (Round to the nearest dollar.)

	ABC		XYZ
FCF	Debt Payments	Equity Dividends	Debt Payments	Equity Dividends
$800	$nothing	$nothing	$nothing	$nothing
$1,000	$nothing	$nothing	$nothing	$nothing

b. Suppose you hold

10%

of the equity of ABC. What is another portfolio you could hold that would provide the same cash flow?(Select from the drop-down menus and round to the nearest integer.)

Sell

Buy

nothing%

of

ABC

XYZ

debt, and

Sell

Buy

nothing%

of

ABC

XYZ

equity.c. 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?(Select from the drop-down menus and round to the nearest integer.)

Buy

Sell

nothing%

of

ABC

XYZ

debt, and

Buy

Sell

nothing%

of

XYZ

ABC

equity.