Firm A and Firm B operate in a perfect capital market environment. Each generates $5M...
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Firm A and Firm B operate in a perfect capital market environment. Each generates $5M (M = million) of operating income. Firm A pays $1.8M in interest giving a net income of $3.2M. Firm B pays no interest and so its net income is $5M. Firm A and Firm B have respective market values of $30M and $25M. Firm As debt is $15M while Firm Bs debt is 0. You own 1% of Firm As equity and can borrow at 12%. What amount can you make through the arbitrage process without taking on additional risk?
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