Assume a perfectly competitive market with no corporate or personal taxes. Companies A and B each

QUESTION

Assume a perfectly competitive market with no corporate or personal taxes. Companies A and B each earn gross profits of P and differ only in their capital
structureA is wholly equity-financed and B has debt outstanding on which it pays a certain $100 of interest each year. Investor X purchases 10 percent of
the equity of A.

a. What profits does X obtain?

b. What alternative strategy would provide the same result?

c. Suppose investor Y purchases 10 percent of the equity of B. What profits does Y obtain?

d. What alternative strategy would provide the same result?
a. What profits does X obtain? 10% of profit of Company A = 0.10 P b. What alternative strategy would provide the same result? Buy 10% of Company Bs debt and Buy 10 % of Company Bs equity c. Suppose investor Y purchases 10 percent of the equity of B. What profits does Y

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