Suppose there are no taxes. Firm ABC has no debt, and firm XYZ has debt of $5000 on which it pays interest of 10% each year. Both companies have identical projects that generate free cash flows of $800 or $1000 each year. After paying any interest on debt, both companies use all remaining free cash flows to pay dividends each year.

Fill in the table below showing the payments debt and equity holders of each firm will receive given each of the two possible levels of free cash flows.

Total Debt	5,000.00
Interest rate	10.00%

	ABC		XYZ
	Debt	Equity	Debt	Equity
FCF	Payments	Dividends	Payments	Dividends
800.00	0	800	500	300
1,000.00	0	1000	500	500

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

10.00%	provide cash flows of			or		per year
These cash flows could be replicated by
owning				of the debt and		of the equity of XYZ.
The debt cash flows would be				per year		in either case.
The equity cash flows would be				or		per year
For total cash flows of				or		per year, as you would get from buying ABC equity.

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?

10.00%	provide cash flows of		or		per year
These cash flows could be replicated by
borrowing			and buying		of the equity of ABC.
You would receive dividends of			or
and pay interest of			per year		in either case.
for a total cash flow of			or		per year, as you would get from buying XYZ equity.