Using the Modigliani-Miller (MM) theory in a perfect market, you can identify a current situation in the market as follows. ABC Industries and XYZ Technology have identical assets that generate identical cash flows. ABC Industries is an all-equity firm, with 15 million shares outstanding that trade for a price of $20 per share. XYZ Technology has debt of $100 million as well as 20 million shares outstanding that trade for a price of $8 per share. To exploit this current situation for a risk-free profit, you understand that you can use homemade leverage and should take the following transactions:
A. Buy ABC Stock; Sell XYZ Stock; and Lend
B. Sell ABC Stock; Buy XYZ Stock; and Lend
C. Buy ABC Stock; Sell XYZ Stock; and Borrow
D. Sell ABC Stock; Buy XYZ Stock; and Borrow
SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE
Get Answers For Free
Most questions answered within 1 hours.