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There are two firms with identical assets and thus the same EBIT, differing only in their capital structure: Nodett Corp. issuing only stocks, and Somedett Corp. issuing bonds and stocks. Assume that Somedett’s bonds are default free. In a frictionless environment, if Nodett’s market value is lower than that of Somedett, what an arbitrage strategy can you adopt to make money? ( )
A.
Sell the shares of Nodett and buy the shares of Somedett.
B.
Short Sell the shares of Nodett and buy the bonds of Somedett.
C.
Buy 1% of the shares of Nodett, buy 1% of the shares of Somedett and sell short 1% of the bonds of Somedett at their market prices respectively.
D.
Buy 1% of the shares of Nodett, short sell 1% of the shares of Somedett and 1% of the bonds of Somedett at their market prices simultaneously.