There are two companies,U and L,which are identical in every respect,except that U is financed entirely through common equity and L has $100,000 in debt at an interest rate of 16 percent.Both companies achieve annual net operating earnings of $45,000.Assume perfect markets and information,with no taxes and no bankruptcy costs.If the market capitalizes firm U at a rate of 10 percent,and the total market value of L is $500,000,is there an arbitrage opportunity available,and if so,what is the net gain?

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The Answer of There are two companies,U and L,which are identical in every respect,except that U is financed entirely through common equity and L has $100,000 in debt at an interest rate of 16 percent.Both companies achieve annual net operating earnings of $45,000.Assume perfect markets and information,with no taxes and no bankruptcy costs.If the market capitalizes firm U at a rate of 10 percent,and the total market value of L is $500,000,is there an arbitrage opportunity available,and if so,what is the net gain?

There Are Two Companies,U and L,which Are Identical in Every