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capital structure arbitrage
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consider a unlevered company U woth 100mil. an otherwise identical company L is financed with 40 mil in equity and 50 mil in risk -less devt(market value)that offeres 10% interest per year. if the economy is weak, the cash flow for each company will be 80mil. if the economy is strong, the cash flow will be 200mil for each company. show how an investor who is able to buy or sell up to 10mil in any security can profit from the violation of the mm proposition. assume no taxes or cost of financial distress
consider a unlevered company U woth 100mil. an otherwise identical company L is financed with 40 mil in equity and 50 mil in risk -less devt(market value)that offeres 10% interest per year. if the economy is weak, the cash flow for each company will be 80mil. if the economy is strong, the cash flow will be 200mil for each company. show how an investor who is able to buy or sell up to 10mil in any security can profit from the violation of the mm proposition. assume no taxes or cost of financial distress
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