Assume capital markets are perfect (as defined by Modigliani-Miller) and all debt is risk-free. Peachtree Inc. has a fir

[answerhappygod]

Assume capital markets are perfect (as defined by
Modigliani-Miller) and
all debt is risk-free. Peachtree Inc. has a firm value of $40
million. Its debt value
is $10 million and its equity value is $30 million. Your friend
explains that if
Peachtree Inc. were debt- free she would like to buy $800,000 worth
of equity.
Remember, in a Modigliani-Miller world the firm value is the same
whether it has
debt or not, so your friend would like to buy 2% ($800,000/$40
million) of this
debt-free (all-equity) company.
Construct a portfolio for your friend, using only Peachtree's
stock plus risk-free
borrowing or lending, which costs $800,000 and has an identical
risk and return
as your friend's desired equity holding. (be sure to specify the
dollar amount
invested in each asset and the return on this strategy.)