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Question 3 (total of 14 marks): For each of the following events, state the effect on the firm's market value of levered equity (E), market value of fixed-coupon debt (D), market value of the firms levered assets (V), systematic risk of the firm's levered assets measured using beta (BV) and existing shareholder wealth.

Important assumptions: The risky firm's levered assets currently have the same systematic risk as the market portfolio, all events happen in isolation and are a surprise, all transactions are done at a fair price, that there are no transaction costs, no asymmetric information (so ignore signalling effects), no change in the credit risk of the firm's debt and no interest tax shields or depreciation tax shields due to the absence of corporate and personal taxes.

Note that there are 7 columns here to answer in this table, you may have to scroll right to see them.

	Market Value of Firm's Debt	Market Value of Firm's Equity	Share price	Number of shares	Market Value of the Firms Assets	Systematic risk of the firm's assets	Existing Shareholder wealth
	(D)	(E)	(P)	(n)	(V)	(BV)
Issue $1m of bonds and use the funds to pay a $1m higher CEO bonus this year, which the market believe is a total waste.	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged
Buys a patent (intangible asset) with a beta of 2 funded half with loans and half via a rights issue.	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged
Conducts a 100% stock dividend (or 1-for-1 bonus issue).	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged
Undertakes a private placement at a 40% discount to the pre-announcement market price.	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged
Cuts in high-risk R&D which leads to higher profits in the short term but the market believe are overall a negative NPV decision.	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged
Short squeeze enacted by amateur traders coordinating on the internet forum Reddit.	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	Up or nothing	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged
The pandemic ending earlier than expected due to successful vaccines.	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	IncreaseDecreaseUnchanged	anything	IncreaseDecreaseUnchanged

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