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?
Intermediate Financial Management (MindTap Course List)
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ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter15: Distributions To Shareholders: Dividends And Repurchases
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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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