Arbitrage (verb): To take advantage of mispriced securities in the market in order to capture a...

  

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Arbitrage (verb): To take advantage of mispriced securities in the market in order to capture a risk-free profit with zero net outlay of your own capital. The following information applies to the next THREE questions: Disney Inc. and Whitewhale Inc. are identical companies, except for capital structure. They operate in a perfect capital market with no taxes, transactions costs, or bankruptcy costs. The two companies have identical assets and identical business risk. Each company is expected to produce net free cash flows of $90 billion per year from their projects in perpetuity. Each company distributes all of its free cash flows each year. Disney has permanent debt yielding 5.0% per annum, with a market value of $150 billion. Shares of Disney currently sell for $27 per share, with 11 billion shares outstanding at this time. Whitewhale has 21 billion outstanding shares that trade at a price of $23 cach. Whitewhale has no debt. Diane is a Los Angeles-based blogger struggling to make rent who thinks she has spotted an arbitrage opportunity in the current values of Whitewhale and Disney, which she wishes to exploit so that she can afford to quit her job and move to Chicago with her not-boyfriend Guy to write her book One Last Thing and Then I Swear to God I'll Shut Up About This Forever: Dispatches from the Frontlines of the War on Women: Arguments, Opinions, Reflections, Recollections, The Razor Tax. Diane has a friend, Bojack, who is willing to lend her either his 63,000 thousand shares of Whitewhale or his 63,000 thousand shares of Disney for as long as she wants. Bojack's only condition is that Diane pay him the dividends that he would have received each year had he not lent her the shares. Outside of her friendship with Bojack, Diane has no other opportunities to borrow shares of these two firms. Question 5 Which of the following are the actions that Diane must take in order to capture the maximum immediate arbitrage profit today from the above scenario? a. Sell 33,000 shares of Disney; borrow $450,000 at 5.0%; buy 63,000 shares of Whitewhale b. Buy 63,000 shares of Whitewhale; lend $450,000 at 5.0%; sell 33,000 shares of Disney c. Buy 63,000 shares of Disney; borrow $450,000 at 5.0%; sell 33,000 shares of Whitewhale d. Sell 63,000 shares of Whitewhale; lend $450,000 at 5.0%; buy 33,000 shares of Disney e. Sell 63,000 shares of Disney; lend $450,000 at 5.0%; buy 33,000 shares of Whitewhale f. Sell 63,000 shares of Disney; borrow $450,000 at 5.0%; buy 33,000 shares of Whitewhale. Question 6 With the opportunities available to her, what is the maximum possible arbitrage profit that Diane would be able to capture immediately? a. $270,000 b. $558,000 c. $441,000 d. $999,000 c. $108,000 f. $22,500 Question 7 Assume that Diane is not the only struggling blogger that notices the arbitrage opportunity. Which of the following statements is true about the effect of their collective profiteering on the market values of Whitewhale and Disney a. Buying the undervalued shares of Whitewhale will drive their price up to- wards equilibrium, while selling the overvalued shares of Disney will drive their price down toward equilibrium. Arbitrage will continue until the mar- ket value of Disney's assets equals the market value of Whitewhale's assets. b. Selling the overvalued shares of Whitewhale will drive their price down to- wards equilibrium, while buying the undervalued shares of Disney will drive their price up toward equilibrium. Arbitrage will continue ntil market. value of Whitewhale's assets equals the market value of Disney's assets. c. Buying the undervalued shares of Disney will drive their price up towards equilibrium, while selling the overvalued shares of Whitowhale will drive their price down toward equilibrium. Arbitrage will continue until the mar- ket value of Disney's equity equals the market value of Whitewhale's equity. d. Selling the undervalued shares of Whitewhale will drive their price down. towards equilibrium, while buying the overvalued shares of Disney will drive their price up toward equilibrium. Arbitrage will continue until the market value of Whitewhale's equity equals the market value of Disney's equity. e. Selling the undervalued shares of Disney will drive their price down towards equilibrium, while buying the overvalued shares of Whitewhale will drive their price up toward equilibrium. Arbitrage will continue until the market value of Disney's assets equals the market value of Whitewhale's assets. Arbitrage (verb): To take advantage of mispriced securities in the market in order to capture a risk-free profit with zero net outlay of your own capital. The following information applies to the next THREE questions: Disney Inc. and Whitewhale Inc. are identical companies, except for capital structure. They operate in a perfect capital market with no taxes, transactions costs, or bankruptcy costs. The two companies have identical assets and identical business risk. Each company is expected to produce net free cash flows of $90 billion per year from their projects in perpetuity. Each company distributes all of its free cash flows each year. Disney has permanent debt yielding 5.0% per annum, with a market value of $150 billion. Shares of Disney currently sell for $27 per share, with 11 billion shares outstanding at this time. Whitewhale has 21 billion outstanding shares that trade at a price of $23 cach. Whitewhale has no debt. Diane is a Los Angeles-based blogger struggling to make rent who thinks she has spotted an arbitrage opportunity in the current values of Whitewhale and Disney, which she wishes to exploit so that she can afford to quit her job and move to Chicago with her not-boyfriend Guy to write her book One Last Thing and Then I Swear to God I'll Shut Up About This Forever: Dispatches from the Frontlines of the War on Women: Arguments, Opinions, Reflections, Recollections, The Razor Tax. Diane has a friend, Bojack, who is willing to lend her either his 63,000 thousand shares of Whitewhale or his 63,000 thousand shares of Disney for as long as she wants. Bojack's only condition is that Diane pay him the dividends that he would have received each year had he not lent her the shares. Outside of her friendship with Bojack, Diane has no other opportunities to borrow shares of these two firms. Question 5 Which of the following are the actions that Diane must take in order to capture the maximum immediate arbitrage profit today from the above scenario? a. Sell 33,000 shares of Disney; borrow $450,000 at 5.0%; buy 63,000 shares of Whitewhale b. Buy 63,000 shares of Whitewhale; lend $450,000 at 5.0%; sell 33,000 shares of Disney c. Buy 63,000 shares of Disney; borrow $450,000 at 5.0%; sell 33,000 shares of Whitewhale d. Sell 63,000 shares of Whitewhale; lend $450,000 at 5.0%; buy 33,000 shares of Disney e. Sell 63,000 shares of Disney; lend $450,000 at 5.0%; buy 33,000 shares of Whitewhale f. Sell 63,000 shares of Disney; borrow $450,000 at 5.0%; buy 33,000 shares of Whitewhale. Question 6 With the opportunities available to her, what is the maximum possible arbitrage profit that Diane would be able to capture immediately? a. $270,000 b. $558,000 c. $441,000 d. $999,000 c. $108,000 f. $22,500 Question 7 Assume that Diane is not the only struggling blogger that notices the arbitrage opportunity. Which of the following statements is true about the effect of their collective profiteering on the market values of Whitewhale and Disney a. Buying the undervalued shares of Whitewhale will drive their price up to- wards equilibrium, while selling the overvalued shares of Disney will drive their price down toward equilibrium. Arbitrage will continue until the mar- ket value of Disney's assets equals the market value of Whitewhale's assets. b. Selling the overvalued shares of Whitewhale will drive their price down to- wards equilibrium, while buying the undervalued shares of Disney will drive their price up toward equilibrium. Arbitrage will continue ntil market. value of Whitewhale's assets equals the market value of Disney's assets. c. Buying the undervalued shares of Disney will drive their price up towards equilibrium, while selling the overvalued shares of Whitowhale will drive their price down toward equilibrium. Arbitrage will continue until the mar- ket value of Disney's equity equals the market value of Whitewhale's equity. d. Selling the undervalued shares of Whitewhale will drive their price down. towards equilibrium, while buying the overvalued shares of Disney will drive their price up toward equilibrium. Arbitrage will continue until the market value of Whitewhale's equity equals the market value of Disney's equity. e. Selling the undervalued shares of Disney will drive their price down towards equilibrium, while buying the overvalued shares of Whitewhale will drive their price up toward equilibrium. Arbitrage will continue until the market value of Disney's assets equals the market value of Whitewhale's assets.

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Which of the following are the actions that Diane must take in order to capture the maximum immediate arbitrage profit today from the above scenario a Sell 33000 shares of Disney borrow 450000 at 50 b... View the full answer