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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 trading 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 1, what should be the share price for Omega Technology?

b) Suppose shares of Omega Technology currently trade for $11 per share. What arbitrage opportunity is available? What assumptions are necessary to exploit this opportunity?

Microeconomics, Economics

  • Category:- Microeconomics
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