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The next few questions will be based on the same table and statistics that follow....

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Finance

The next few questions will be based on the same table and statistics that follow. To save you re-reading everything again in these subsequent questions, note that none of the following details will change such as the risk free rate, MRP, cash or trucks, but more items may be added to the table.

A 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

Which of the following statements is NOT correct?

Select one:

a.

The firms total asset beta is 1 and required return on assets (or WACC before tax) is 8% pa.

b.

The cash assets required return is 3% pa.

c.

If the market portfolio suddenly rose by 1%, then the expected market value of the cash would rise 1% to be worth $0.01m more.

d.

The trucks required return is 13% pa.

e.

If the market portfolio suddenly rose by 1%, then the trucks expected market value would rise 2% to be worth $0.01m more.

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