Carbon and Short plc both operate in the same industry with the same business risk. Their earnings, capital structure, share prices and other data are as follows:

Kitson holds £1,000 worth of shares in Short and can borrow at the same rate as Short. Show how Kitson can increase his wealth through arbitrage. Ignore taxes and transaction costs.

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Carbon plc Short plc £000 £000 Annual operating income Annual interest Annual cash flow Equity market value Debt market value Total market value Cost of equity capital Cost of debt capital WACC No. of shares in issue Market price per sha 500 nil 500 3,125 nil 3,125 16% 1,000 200 1,200 6,000 2,000 8,000 16.6% 1096 15% 16% 3.25m 96p 120p