The Day Company and the Knight Company are identical in every respect except that

Day is not levered. Financial information for the two firms appears in the following table.

All earnings streams are perpetuities, and neither firm pays taxes. Both firms distribute all

earnings available to common stockholders immediately.

a$-1.$ What will the annual cash flow be to an investor who purchases $10$ percent of

Knight's equity? $($Do not round intermediate calculations and round your answer

to the nearest whole number, e$.$g$.,32.)$

$a-2.$ What is the annual net cash flow to the investor if $10$ percent of Day's equity is

purchased instead? Assume that borrowing occurs so that the net initial investment

in each company is equal. The interest rate on debt is $6$ percent per year. $($Do not

round intermediate calculations and round your answer to the nearest whole

number, e$.$g$.,32.)$

b$.$ Given the two investment strategies in $($a$),$ which will investors choose?

Knight

Day