Two identical firms (except for leverage) have perpetual earnings before interest and tax (EBIT) of $100K . One firm is unlevered while the other has $1 million of 4% coupon perpetual debt. cost of unlevered equity is 10 % p.a. cost of levered equity is 15% p.a. Current market yield on the debt is 9% p.a. and there are no taxes. Assuming MM are correct, show how you can make risk free profits for the same return. (hint: calculate the value of the levered and unlevered firms, then state the cashflows of the buy/sell actions in your argument). Explain how your actions help to restore equilibrium and why the risk remains the same. Calculate the MM levered equity return and draw a graph of return vs D/E ratio to illustrate your answer. Having trouble with this textbook question