Suppose there are no taxes. Firm ABC has no debt, and firm XYZ has debt of

$3,000

on which it pays interest of

11%

each year. Both companies have identical projects that generate free cash flows of

$700

or

$1,400

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

11%,

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
$700	$nothing	$nothing	$nothing	$nothing
$1,400	$nothing	$nothing	$nothing	$nothing