A levered firm has only 2 assets on its balance sheet with the below market values...

 

Transcribed Image Text:

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 Item Market value ($m) Beta Cash asset 0.5 Truck asset 0.5 Loan liabilities 0.25 0.1 Equity funding ? ? The firm then pays out all of its cash as a dividend. Assume that the beta and yield on the loan liability remain unchanged. Which of the following statements is NOT correct? This event led to a: Select one: a. $0.5m decrease in equity to $0.25m and cash to zero. b. Asset beta of 1 and required return on assets (or WACC before tax) of 8% pa. c. $0.50 fall in the share price if there are 1 million shares. O d. Equity beta of 3.9 and required return of 22.5% pa. е. Debt-to-assets ratio of 50%. A levered firm has only 2 assets on its balance sheet with the below market values and CAPM betas. The risk free rate is 3% pa and the market risk premium is 5% pa. Assume that the CAPM is correct and all assets are fairly priced. Selected Company Details Item Market value ($m) Beta Cash asset 0.5 Truck asset 0.5 Loan liabilities 0.25 0.1 Equity funding ? ? The firm then pays out all of its cash as a dividend. Assume that the beta and yield on the loan liability remain unchanged. Which of the following statements is NOT correct? This event led to a: Select one: a. $0.5m decrease in equity to $0.25m and cash to zero. b. Asset beta of 1 and required return on assets (or WACC before tax) of 8% pa. c. $0.50 fall in the share price if there are 1 million shares. O d. Equity beta of 3.9 and required return of 22.5% pa. е. Debt-to-assets ratio of 50%. A levered firm has only 2 assets on its balance sheet with the below market values and CAPM betas. The risk free rate is 3% pa and the market risk premium is 5% pa. Assume that the CAPM is correct and all assets are fairly priced. Selected Company Details Item Market value ($m) Beta Cash asset 0.5 Truck asset 0.5 Loan liabilities 0.25 0.1 Equity funding ? ? The firm then pays out all of its cash as a dividend. Assume that the beta and yield on the loan liability remain unchanged. Which of the following statements is NOT correct? This event led to a: Select one: a. $0.5m decrease in equity to $0.25m and cash to zero. b. Asset beta of 1 and required return on assets (or WACC before tax) of 8% pa. c. $0.50 fall in the share price if there are 1 million shares. O d. Equity beta of 3.9 and required return of 22.5% pa. е. Debt-to-assets ratio of 50%. A levered firm has only 2 assets on its balance sheet with the below market values and CAPM betas. The risk free rate is 3% pa and the market risk premium is 5% pa. Assume that the CAPM is correct and all assets are fairly priced. Selected Company Details Item Market value ($m) Beta Cash asset 0.5 Truck asset 0.5 Loan liabilities 0.25 0.1 Equity funding ? ? The firm then pays out all of its cash as a dividend. Assume that the beta and yield on the loan liability remain unchanged. Which of the following statements is NOT correct? This event led to a: Select one: a. $0.5m decrease in equity to $0.25m and cash to zero. b. Asset beta of 1 and required return on assets (or WACC before tax) of 8% pa. c. $0.50 fall in the share price if there are 1 million shares. O d. Equity beta of 3.9 and required return of 22.5% pa. е. Debt-to-assets ratio of 50%. A levered firm has only 2 assets on its balance sheet with the below market values and CAPM betas. The risk free rate is 3% pa and the market risk premium is 5% pa. Assume that the CAPM is correct and all assets are fairly priced. Selected Company Details Item Market value ($m) Beta Cash asset 0.5 Truck asset 0.5 Loan liabilities 0.25 0.1 Equity funding ? ? The firm then pays out all of its cash as a dividend. Assume that the beta and yield on the loan liability remain unchanged. Which of the following statements is NOT correct? This event led to a: Select one: a. $0.5m decrease in equity to $0.25m and cash to zero. b. Asset beta of 1 and required return on assets (or WACC before tax) of 8% pa. c. $0.50 fall in the share price if there are 1 million shares. O d. Equity beta of 3.9 and required return of 22.5% pa. е. Debt-to-assets ratio of 50%. A levered firm has only 2 assets on its balance sheet with the below market values and CAPM betas. The risk free rate is 3% pa and the market risk premium is 5% pa. Assume that the CAPM is correct and all assets are fairly priced. Selected Company Details Item Market value ($m) Beta Cash asset 0.5 Truck asset 0.5 Loan liabilities 0.25 0.1 Equity funding ? ? The firm then pays out all of its cash as a dividend. Assume that the beta and yield on the loan liability remain unchanged. Which of the following statements is NOT correct? This event led to a: Select one: a. $0.5m decrease in equity to $0.25m and cash to zero. b. Asset beta of 1 and required return on assets (or WACC before tax) of 8% pa. c. $0.50 fall in the share price if there are 1 million shares. O d. Equity beta of 3.9 and required return of 22.5% pa. е. Debt-to-assets ratio of 50%.

Answer rating: 100% (QA)

Option D is correct since it is incorrect because Equity B... View the full answer