Two firms. U and L. are identical except for their capital structure. Both will earn $150 in a boom and $50 in a slump. there is a 50% chance of each event. U i entirely equity-financed, and shareholders receive the entire income. Its shares are value at $500, L has issued $400 risk-free debt @ interest rate of 10%. There is no tax and the capital market is perfect. Investors can borrow and lend at risk-free rate. What is the value of L's stock: Suppose that you invest $20 in U's stock. Is there an alternative investment in L that would give you identical payoff in boom and slump? What is the expected payoff of such strategy? Now suppose that you invest $20 in L's stock. Design an alternative strategy with U's stock with identical payoff. Does MM II hold, why? Two firms. U and L. are identical except for their capital structure. Both will earn $150 in a boom and $50 in a slump. there is a 50% chance of each event. U i entirely equity-financed, and shareholders receive the entire income. Its shares are value at $500, L has issued $400 risk-free debt @ interest rate of 10%. There is no tax and the capital market is perfect. Investors can borrow and lend at risk-free rate. What is the value of L's stock: Suppose that you invest $20 in U's stock. Is there an alternative investment in L that would give you identical payoff in boom and slump? What is the expected payoff of such strategy? Now suppose that you invest $20 in L's stock. Design an alternative strategy with U's stock with identical payoff. Does MM II hold, why