Wolfrum Technology $($WT$)$ has no debt. Its assets will be worth $$476$ million in one year if the

economy is strong, but only $$262$ million in one year if the economy is weak. Both events are

equally likely. The market value today of its assets is $$286$ million.

a$.$ What is the expected retum of WT stock without leverage?

b$.$ Suppose the risk$-$free interest rate is $5\%.$ If $WT$ borrows $$93$ million today at this rate and uses

the proceeds to pay an immediate cash dividend, what will be the market value of its equity

just after the dividend is paid, according to MM$?$

c$.$ What is the expected retum of WT stock after the dividend is paid in part $($b$)?$

Modigliani$-$Miller I: Leverage, Arbitrage, and Firm Value

Suppose there are no taxes. Firm ABC has no debt, and firm $xYZ$ has debt of $$5000$ on which it

pays interest of $10\%$ each year. Both companies have identical projects that generate free cash

flows of $$800$ or $$1000$ each year. After paying any interest on debt, both companies use all

remaining free cash flows to pay dividends each year.

a$.$ Fill in the table below showing the payments debt and equity holders of each firm will receive

given each of the two possible levels of free cash flows.

ABC

$xYZ$

b$.$ Suppose you hold $10\%$ of the equity of ABC. What is another portfolio you could hold that

would provide the same cash flows?

c$.$ Suppose you hold $10\%$ of the equity of XYZ$.$ If you can borrow at $10\%,$ what is an altemative

strategy that would provide the same cash flows?

Suppose Alpha Industries and Omega Technology have identical assets that generate identical cash

flows. Alpha Industries is an all$-$equity firm, with $10$ million shares outstanding that trade for a price of

$$22$ per share. Omega Technology has $20$ million shares outstanding as well as debt of $$60$ million.

a$.$ According to MM Proposition I, what is the stock price for Omega Technology?

b$.$ Suppose Omega Technology stock currently trades for $$11$ per share. What arbitrage

opportunity is available? What assumptions are necessary to exploit this opportunity?

Cisoft is a highly profitable technology firm that currently has $$2$ billion in cash. The firm has decided

to use this cash to repurchase shares from investors, and it has already announced these plans to