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

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