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 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:
a.
$0.25m decrease in loan liabilities to zero and cash to $0.25m.
b.
Asset beta of 0.8 and required return (or WACC before tax) of 7% pa.
c.
Equity beta of 1.266667 and required return of 9.333333% pa.
d.
No change in the share price or number of shares.
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