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

The Veblen Company and the Knight Company are identic al in every respect except that Veblen 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 Veblen Knight Projected operating income 650,000 650,000 -$87,000 $ 3,400,000 $2,200,000 -$1,450,000 Year-end interest on debt Market value of stock Market value of debt a-1 What will the annual cash flow be to an investor who purchases 10 percent of Knight's equity? 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 6 percent per year Net cash flow b. Given the two investment strategies in (a), which will investors choose? Veblen O Knight