Question: 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

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 Bs bond is 12%. There are no taxes, all cash flows are perpetual, no bankruptcy cost and no asymmetric information. Also, payout ratio will be 100%. Accounting data on the two firms is as follows: Firm A Firm B EBIT $300,000 $300,000 Interest 0 ? Earning $300,000 ? Market Value of Stock ? $1,500,000 Market Value of Debt 0 $900,000 Total Market Value of Firm ? $2,400,000 a) What should be interest expense, earning and market value of debt for Firm B? b)What should the market value As stock be in an efficient market? c)Now suppose that the market value of As stock is $2.2 million. How would you like to take advantage of this?

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