Question: 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

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.

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

Step by Step Solution

★★★★★

3.50 Rating (170 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

First Kitson should sell his 1000 of shares in Short and b... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

1218-B-C-F-D-P(700).docx

120 KBs Word File

Students Have Also Explored These Related Corporate Finance Questions!

How can two companies with very different cultures that operate in the same industry both be successful? Shouldnt one companys culture automatically be a better fit for the environment?

Income As an aspiring financial analyst, you have applied to a major Wall Street firm for a summer job. To screen potential applicants, the firm provides you a short case study and asks you to...

Caren Company and Revlon Company are similar firms that operate in the same industry. Revlon began operations in 2009 and Caren in 2006. In 2011, both companies pay 7% interest on their debt to...

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 1000 worth of shares in...

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: Carbon plc Short plc Sh 000 Sh 000...

Summarize the economic outlook for your industry. Look at recent market activity, recent indicators impacting your industry. Address recent change in stock prices. See the Analysis Tab of the FSAPfor...

Identify the nature of Ryanair's business-level strategy ( case study Ryanair- the low-fares airline) CASE STUDY Ryanair: the low fares airline - future destinations? Eleanor O'Higgins The case...

looking for the solution for this hedging on Porsche case. Recalibrated to PUT USD Euro Sales Currency Spot USD Sales Currency $/ Currency /$ Simulated EUR USD Conversion Risk Currency $/ Put Option...

Carbon dioxide at 15 MPa is injected into the top of a 5-km deep well in connection with an enhanced oil-recovery process. The fluid column standing in the well is at a uniform temperature of...

At a distance of 12.0 m from a point source, the intensity level is measured to be 70 dB. At what distance from the source will the intensity level be 40 dB?

Consider having a pressurised gas tank of Helium having pressure 2 0 MPA and and tanks dimensions are in spherical and assume some dimensions for pipes and pressure regulator and valves and chamber...

9- 11 In addition to carrying goods from one place to another, some trucking companies provide supply chain management services and help their customers manage their information. In this project,...

The following financial statements are extracts from the accounts of Hoult Ltd: Annual depreciation was c18 000 in year 1, c13 000 in year 2 and c11 000 in year 3. The 8 per cent bonds are redeemable...

Recent research into the efficient market hypothesis has explored anomalies in share price behaviour. Briefly describe some of these anomalies and suggest possible explanations.

Explain the meaning of economic value added (EVA). How can EVA help financial managers to create value for shareholders?

Multiple questions, qu stions, 1. What does a Dynamic Host Configuration Protocol (DCHP) server do? a. Translates between local private IP addresses and public Internet-wide IP addresses. b. Converts...

B o rrow before its current ratio target is reached? (Ratio analysis) The balan balance sheet and income statement for the A. Thiel MS company are as follows: Balance Sheet($000) (cast Accounts...

3. Income statement The Income statement, also known as the profit and loss (P&L) statement, provides a snapshot of the financial performance of a company during a specified period of time. It...