Question: 'Companies A and B differ only in their capital structure. A is financed 30% debt and 70% equity; B is financed with 10% debt and

'Companies A and B differ only in their capital structure. A is financed 30% debt and 70% equity; B is financed with 10% debt and 90% equity. The debt of both companies is risk-free.

a) Rose owns 1% of the common stock of A. What other investment package would produce identical cash flows for Rose?

b) Gilda owns 2% of the common stock of B. What other investment package would produce identical cash flows for Gilda?

c) Show that neither Rose nor Gilda would invest in the common stock of B if the total value of Company A were less than that of B.

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