Firm A and B are identical except that A is unlevered(i.e no debt), while B has bonds outstanding paying 12% coupon per year with face value of 0.9 million.

Market yield(rD) for B's bond is 12%. There are no taxes, all cash flows are perpetual, no bankruptcy cost and no asymmetric infromation. Also, payout ratio will be

100%. Accounting data on the two firms is as follows

Firm A

Ebit: $300,000 Interest: 0 Earning: $300,000 Market value of stock: ?

Firm B

Ebit: $300,000 Interest: ? Earning: ? Market value of stock: $1,500,000

a) What should be interest expense, earning and market value of debt for Firm B?

b) What should the market value A's stock be in an efficient market?

c) Now suppose that the market value of A's stock is $2.2million. How would you like to take advantage of this? Be specific on your strategy