Assume perfect capital markets. Assume also that Armadillo Corp. has assets that will pay either $300 million or $500 million a year from today. Armadillo has outstanding bonds that mature for $250 million a year from today. The value today of Armadillo’s bonds is $205 million and of Armadillo’s outstanding stock is $80 million. Lagras Corp. has assets that are identical to Armadillo, but its debt matures for $450 million a year from today. These bonds have a value today of $240 million and its outstanding stock has a value of $40 million. 

Create a table that answers the following questions:

 What set of transactions today will generate an arbitrage profit today? 

What arbitrage profit will these transactions create today? 

What cash flows will each of your transactions today create today and a year from today?

Answer rating: 100% (QA)

To determine the set of transactions that will generate an arbitrage profit today we need to compare the values of Armadillo Corps and Lagras Corps as... View the full answer