Suppose Summa Industries and Cumma Technology have identical assets that generate identical cash flows. Summa Industries is an all-equity firm, with 12 million shares outstanding that trade for a price of $16.00 per share. Cumma Technology has 18 million shares outstanding, as well as debt of $57.60 million. a. According to MM Proposition I, what is the stock price for Cumma Technology? b. Suppose Cumma Technology stock currently trades for $10.74 per share. What arbitrage opportunity is available? What assumptions are necessary to exploit this opportunity?
Suppose Summa Industries and Cumma Technology have identical assets that generate identical cash flows. Summa Industries is an all-equity firm, with 12 million shares outstanding that trade for a price of $16.00 per share. Cumma Technology has 18 million shares outstanding, as well as debt of $57.60 million. a. According to MM Proposition I, what is the stock price for Cumma Technology? b. Suppose Cumma Technology stock currently trades for $10.74 per share. What arbitrage opportunity is available? What assumptions are necessary to exploit this opportunity?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Suppose Summa Industries and Cumma Technology have identical assets that generate identical cash flows.
Summa Industries is an all-equity firm, with 12 million shares outstanding that trade for a price of $16.00 per share.
Cumma Technology has 18 million shares outstanding, as well as debt of $57.60 million.
a. According to MM Proposition I, what is the stock price for Cumma Technology?
b. Suppose Cumma Technology stock currently trades for $10.74 per share. What arbitrage opportunity is available?
What assumptions are necessary to exploit this opportunity?
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Transcribed Image Text:b. Suppose Cumma Technology stock currently trades for $10.74 per share. What arbitrage opportunity is available?
What assumptions are necessary to exploit this opportunity?
If Cumma Technology stock currently trades for $10.74 per share, an example of an arbitrage opportunity that exists
today which requires no future cash flow obligations would be: (Select from the drop-down menus and round to two
decimal places.
Sell
million shares of
current price of $ and borrow $
at the current price of $
million.
and buy
million shares of
at the
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