A levered firm has only 2 assets on its balance sheet with the below market...
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Finance
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 | 0 |
| Truck asset | 0.5 | 2 |
| 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.
d.
Equity beta of 3.9 and required return of 22.5% pa.
e.
Debt-to-assets ratio of 50%.
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