The Veblen Company and the Knight Company are identical in every respect except that Veblen is not levered. The market value of Knight Company's 4 percent bonds is $2.25 million. Financial information for the two firms appears here. All earnings streams are perpetuities. Neither firm pays taxes. Both firms distribute all earnings available to common stockholders immediately.

VeblenKnightProjected operating income$1,450,000$1,450,000Year-end interest on debt90,000Market value of stock5,000,0003,000,000Market value of debt2,250,000

a-1.What will the annual cash flow be to an investor who purchases 10 percent of Knight's equity?(Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Cash flow$

a-2.What is the annual net cash flow to the investor if 10 percent of Veblen'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 4 percent per year.(Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Net cash flow$

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

Knight

Veblen