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Companies A and B differ only in their capital structure

Accounting Apr 01, 2023

Companies A and B differ only in their capital structure. A is financed 30% debt and 70% equity: B is financed 10% debt and 90% equity. The debt of both companies is risk-free.

a. Rosencrantz owns 1% of the common stock of A. What other investment package (involving shares in company B) would produce identical cash flow for Rosencrantz?

b. Guildenstern owns 2% of common stock of B. What other investment package (involving shares in company A) would produce identical cash flows for Guildenstern?

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