Question: 16. For some reason, the market puts a higher value on firms without debt than on firms with debt, as below, even though the firms

16. For some reason, the market puts a higher value on

16. For some reason, the market puts a higher value on firms without debt than on firms with debt, as below, even though the firms have identical assets and operations. As an investor, what actions could you take to reap free profits? Assume you can afford to buy a whole firm and there are no taxes of any kind. Answer: Levered Firm Un-Levered Firm Liabilities $5 Liabilities $0 Stockholder's Equity $10 Stockholder's Equity $18 16. For some reason, the market puts a higher value on firms without debt than on firms with debt, as below, even though the firms have identical assets and operations. As an investor, what actions could you take to reap free profits? Assume you can afford to buy a whole firm and there are no taxes of any kind. Answer: Levered Firm Un-Levered Firm Liabilities $5 Liabilities $0 Stockholder's Equity $10 Stockholder's Equity $18

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