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CHAPTER TWELVE PRINCIPLES OF CAPITAL STRUCTURE Increasing income by arbitrage [LO 21 Quarrion Books Lid and Cockatiel Books Ltd are identical in every respect except that Quarrion ng while Cockatiel has a $2 million loan at an two companies is as follows: of an interest rate of 8 per cent. There are no taxes. The valuation of the y respect except that Quarrion has no debt Item Quarrion Books Cockatiel Books Earnings before interest ($) 700000 700000 less Interest on loan ($) 160 000 Income available to ordinary 700000 540000 shareholders ($) divided by Cost of equity (k) 0.14 0.16 equals Market value of equity ($) 5000 000 3375 000 plus Market value of debt ($) 2000000 5000000 5375000 equals Total market value ($) equals Jane owns $10000 worth of Cockatiel shares. Show the process and the amount by which Jane could increase her income by the use of arbitrage. Increasing income without increasing risk (LO 2] The following information relates to two companies with the same business risk. There are no taxes, Penrith Pet Food