Two firms that are virtually identical except for their capital structure are selling in the market at different values. According to M&M?

The answer is option4.............

Option4 is the right answer.

4. this will not continue because arbitrage will eventually cause the firms to sell at the same value.

Answer is4 : This will not continue because arbitrage cause the firms to sell at the same value as per MM approach...

Option4--------------------------------------

this proves that markets cannot be efficient

 the firm with greater financial leverage will have the higher value.