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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 $0.5m cash for trucks that are actually worth $0.2m on the market. Assume that the beta and yield on the existing loan liabilities are unchanged compared to before. All figures are given to 6 decimal places. Which of the following statements is NOT correct? This event led to a:

Select one:

a. Bad outcome for the company since the NPV of buying the trucks was -$0.3m.

b. Unchanged market and book value of equity.

c. $0.2m increase in the market value of trucks to $0.7m and a $0.5m increase to the book value of trucks to $1m, assuming the accountant doesnt write-down the value yet.

d. $0.5m decrease in the market and book value of cash to zero.

e. $0.30 decrease in the stock price to $0.45 assuming that there are 1 million shares.

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