70.2K

Verified Solution

Link Copied!

A levered firm has only 2 assets on its balance sheet with the below market values and CAPM betas. The risk free rate is 3% pa and the market risk premium is 5% pa. Assume that the CAPM is correct and all assets are fairly priced. Selected Company Details Market value ($m) Item Beta Cash asset 0.5 0 Truck asset 0.5 2 Loan liabilities 0.25 0.1 Equity funding ? ? The firm then completes a $0.25m loan issue. Assume that the beta and yield on all loan liabilities are equal and unchanged compared to before. Ignore interest tax shields. All figures are given to 6 decimal places. Which of the following statements is NOT correct? This event led to a: Select one: O a $0.25m decrease in loan liabilities to zero and cash to $0.25m. O b. Asset beta of 0.8 and required return (or WACC before tax) of 7% pa. O c. Equity beta of 1.266667 and required return of 9.333333% pa. O d. No change in the share price or number of shares. A levered firm has only 2 assets on its balance sheet with the below market values and CAPM betas. The risk free rate is 3% pa and the market risk premium is 5% pa. Assume that the CAPM is correct and all assets are fairly priced. Selected Company Details Market value ($m) Item Beta Cash asset 0.5 0 Truck asset 0.5 2 Loan liabilities 0.25 0.1 Equity funding ? ? The firm then completes a $0.25m loan issue. Assume that the beta and yield on all loan liabilities are equal and unchanged compared to before. Ignore interest tax shields. All figures are given to 6 decimal places. Which of the following statements is NOT correct? This event led to a: Select one: O a $0.25m decrease in loan liabilities to zero and cash to $0.25m. O b. Asset beta of 0.8 and required return (or WACC before tax) of 7% pa. O c. Equity beta of 1.266667 and required return of 9.333333% pa. O d. No change in the share price or number of shares

Answer & Explanation Solved by verified expert

See Answer