Suppose there are no taxes. Firm ABC has no? debt, and firm XYZhas debt of $4,000 on which it pays interest of 10% each year. Bothcompanies have identical projects that generate free cash flows of$4,700 or $4,200 each year. After paying any interest on? debt,both companies use all remaining free cash flows to pay dividendseach year.
a. In the table? below, fill in the debt payments for each firmand the dividend payments the equity holders of each firm willreceive given each of the two possible levels of free cashflows.
b. Suppose you hold 10% of the equity of ABC. What is anotherportfolio you could hold that would provide the same cash?flows???
c. Suppose you hold 10% of the equity of XYZ. If you can borrowat 10%?, what is an alternative strategy that would provide thesame cash? flows?
