Question 4 Consider the following information about two firms that have identical cash flows and...
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Question 4 Consider the following information about two firms that have identical cash flows and identical levels of risk: Firm A Firm B 3,000,000 3,000,000 Earnings ('s) Equity ('s) Debt ('s) 12,000,000 10,000,000 0 5,000,000 The debt is a 10% irredeemable bond. (a) Show that Mr. Brains, who owns 10% of the equity of firm B, can increase his income by switching from firm B to A. (50%) (b) Assuming no taxes, what are the implications of the Traditionalist and Miller-Modigliani theories on the determination of a company's capital structure assuming no taxes for financial manager? [50%)
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