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Capital structures and values

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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

Reference no: EM132623582

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