Question 3 (total of 12 marks): For each of the following events, state the effect on the firm's market value of debt (), market value of levered equity (), market value of the firms levered assets (), systematic risk of the firm's levered assets measured using beta (), cost of equity , and weighted average cost of capital before tax.

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.

Market Value of Market Value of Market Value of System-atic risk Weighted Firm's Debt (D) Firm's Equity (EL) the Firm's Assets of the firm's average cost of (V) assets (BVL) capital (before A firm: tax) Issues shares and uses the proceeds to invest in a positive NPV project with a higher Increase Increase systematic Decrease Unchanged risk than the firm's usual investments Issues fixed- coupon bonds and - uses the proceeds to repurchase shares. Takes out a bank loan to expand an unprofitable and risky division which the market Increase Decrease Unchanged widely believes to be a negative NPV investment Conducts a 3-for-1 rights issue at a discount to > the current market share price Invests in a lower than average risk project with a positive NPV, funded half with a bank Increase Decrease Unchanged loan and half with a share issue. Unexpectedly generates larger than usual cash flows, and > uses those cash flows to repay debt. Conducts a 2 for 1 share split Market Value of Market Value of Market Value of System-atic risk Weighted Firm's Debt (D) Firm's Equity (EL) the Firm's Assets of the firm's average cost of (V) assets (BVL) capital (before A firm: tax) Issues shares and uses the proceeds to invest in a positive NPV project with a higher Increase Increase systematic Decrease Unchanged risk than the firm's usual investments Issues fixed- coupon bonds and - uses the proceeds to repurchase shares. Takes out a bank loan to expand an unprofitable and risky division which the market Increase Decrease Unchanged widely believes to be a negative NPV investment Conducts a 3-for-1 rights issue at a discount to > the current market share price Invests in a lower than average risk project with a positive NPV, funded half with a bank Increase Decrease Unchanged loan and half with a share issue. Unexpectedly generates larger than usual cash flows, and > uses those cash flows to repay debt. Conducts a 2 for 1 share split