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T Suppose there are two firms, each with projected cash flows of either $100 or $150. The firms are identical except for capital structure. Firm
T Suppose there are two firms, each with projected cash flows of either $100 or $150. The firms are identical except for capital structure. Firm L (FL) is unlevered, and its equity has a market value of $990. Company O (CO) has debt of $500 and a market value of $1010.
What is the value of the arbitrage?
List the steps necessary to realize this arbitrage opportunity using homemade leverage.
What will happen to the stock price of FL as a result of the arbitrage?
What will happen to the stock price of CO as a result of the arbitrage?
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