1. Two otherwise identical firms have the following capital structures and values:

firm U 1000 equity 0 debt total value 1000

Firm L 700 equity 400 debt total value 1,100

In an MM world of no taxes, which of the following statements is true:

a.This represents an arbitrage opportunity by buying shares in U and selling shares in L and using homemade leverage

b.This represents an arbitrage opportunity by selling shares in U and buying shares in L and undoing corporate leverage

c.This represents an arbitrage opportunity by buying shares in U and selling shares in L and undoing corporate leverage

d.There are no arbitrage opportunities here, because arbitrage only arises when there are taxes

e.This represents an arbitrage opportunity by selling shares in U and buying shares in L and using homemade leverage