Suppose there are two firms, each with date 1 cash flows of $1,400 or $900. The firms are identical except for their capital structure. One firm is unlevered, and its equity has a market value of $990. The other firm has borrowed $500, and its equity has a market value of $510.

I understand that MM proposition 1 does not hold in the following case. Could you please explain what the arbitrage opportunity is and how it works?

How does the firm borrow $500 to but unlevered equity worth $990?