CAPM

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 Market value ($m) Item Beta Cash asset 0.5 0 Truck asset 0.5 2 Loan liabilities 0.25 0.1 Equity funding ? ? The firm then pays out all of its cash as a dividend. Assume that the beta and yield on the loan liability remain unchanged. Which of the following statements is NOT correct? This event led to a: Select one: O a. $0.5m decrease in equity to $0.25m and cash to zero. O b. Asset beta of 1 and required return on assets (or WACC before tax) of 8% pa. O c. $0.50 fall in the share price if there are 1 million shares. O d. Equity beta of 3.9 and required return of 22.5% pa. Oe. Debt-to-assets ratio of 50%