For each of the following events, state the effect on the appropriate tiles.
(Increase, decrease, unchanged)
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.
The Firm: Market Market Market System Value of Value of Value of atic risk WACC WACC Firms Firms Firms of firms before- after- Debt Equity Assets assets tax tax Issues debt to buy back shares on market conducts a 3 to 1 stock split A firm issues shares in an IPO and keeos the money in the bank A firm sells some of its land and uses th acash to conducston-market repurchase A one for 10 reverse stock split Paying a cash dividend Buying government bonds using cash Discovering and accepting a positive NPV project with a beta of 3, funded using cash A firms sells some government bonds it owns and puts the cash in the bank Conducts a 2 for 5 rights issue at a subscription price less than the pre announcemnt market price A mining firm announces write downs on its gold mines due to lower gold prices, which the market expected A mining firm announces write downs on its silver mines due to less silver than expected, which the market did not anticipate issue of a large amount of debt and use the funds for new positive NPV projects Buying govenments bonds using cash The purchase of a large under-priced asset with a beta of one, funded by issuing shares in a seasoned equity offering Issuing debt and using the proceeds to buy back shares on the market Commencing an on-maket share buyback using cash The Firm: Market Market Market System Value of Value of Value of atic risk WACC WACC Firms Firms Firms of firms before- after- Debt Equity Assets assets tax tax Issues debt to buy back shares on market conducts a 3 to 1 stock split A firm issues shares in an IPO and keeos the money in the bank A firm sells some of its land and uses th acash to conducston-market repurchase A one for 10 reverse stock split Paying a cash dividend Buying government bonds using cash Discovering and accepting a positive NPV project with a beta of 3, funded using cash A firms sells some government bonds it owns and puts the cash in the bank Conducts a 2 for 5 rights issue at a subscription price less than the pre announcemnt market price A mining firm announces write downs on its gold mines due to lower gold prices, which the market expected A mining firm announces write downs on its silver mines due to less silver than expected, which the market did not anticipate issue of a large amount of debt and use the funds for new positive NPV projects Buying govenments bonds using cash The purchase of a large under-priced asset with a beta of one, funded by issuing shares in a seasoned equity offering Issuing debt and using the proceeds to buy back shares on the market Commencing an on-maket share buyback using cash
