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Which is an arbitrage for firms a and b

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Problem 1: Firms A and B have identical assets. There are no frictions. Firm A has no leverage while firm B has a leverage of 50%. Firm A is valued at $100M while firm B is valued at $120M. Which of the following is an arbitrage?

Option 1: Buy firm A and increase leverage.

Option 2: Buy firm B and decrease leverage.

Option 3: Short sell firm A's equity and take on debt.

Option 4: No arbitrage is possible.

Reference no: EM132736928

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