Question 3 (total of 14 marks): For each of the following events, state the effect on the firm's market value of levered equity (EL), market value of fixed-coupon debt (D), market value of the firm's levered assets (VL) and systematic risk of the firm's levered assets measured using beta (Bv). 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 8 columns in this table which you may have to scroll right to see. Market value of Market Value of Share price Number of Market value of Systematic risk Existing share- Firm's Debt Firm's Equity shares the Firm's Assets of the firm's holder wealth assets (D) (ED (PShare) (nshares) (VD (BVL) Issues bonds and invests the Choose... Choose... . proceeds in the money Choose... Choose... Choose... Choose... Choose... market Choose... Choose... Buys an asset with a beta of 1, using cash. Choose... - Choose... + Choose... Choose... Choose... Buys a large over-priced farm with a beta of 0.5 for 10% more than its true Choose... Choose... Choose... Choose... Choose... Choose... Choose... market value, funded by cash. Pays a cash dividend. Assume the ex-dividend date is the payment date. Choose... Choose... Choose... Choose... Choose... Choose... Choose... - Choose... Choose... Buys back (repays) bond liabilities. Choose... Choose... Choose... Choose... Choose... Choose... Discovers a new positive NPV project with a beta of 2, which will be funded by a rights issue. Choose... Choose... Choose... Choose... Choose... Choose.... The corona virus pandemic leads to forced shut downs Choose... Choose... Choose... Choose... Choose... . anything Choose... and a collapse in sales. Question 3 (total of 14 marks): For each of the following events, state the effect on the firm's market value of levered equity (EL), market value of fixed-coupon debt (D), market value of the firm's levered assets (VL) and systematic risk of the firm's levered assets measured using beta (Bv). 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 8 columns in this table which you may have to scroll right to see. Market value of Market Value of Share price Number of Market value of Systematic risk Existing share- Firm's Debt Firm's Equity shares the Firm's Assets of the firm's holder wealth assets (D) (ED (PShare) (nshares) (VD (BVL) Issues bonds and invests the Choose... Choose... . proceeds in the money Choose... Choose... Choose... Choose... Choose... market Choose... Choose... Buys an asset with a beta of 1, using cash. Choose... - Choose... + Choose... Choose... Choose... Buys a large over-priced farm with a beta of 0.5 for 10% more than its true Choose... Choose... Choose... Choose... Choose... Choose... Choose... market value, funded by cash. Pays a cash dividend. Assume the ex-dividend date is the payment date. Choose... Choose... Choose... Choose... Choose... Choose... Choose... - Choose... Choose... Buys back (repays) bond liabilities. Choose... Choose... Choose... Choose... Choose... Choose... Discovers a new positive NPV project with a beta of 2, which will be funded by a rights issue. Choose... Choose... Choose... Choose... Choose... Choose.... The corona virus pandemic leads to forced shut downs Choose... Choose... Choose... Choose... Choose... . anything Choose... and a collapse in sales
