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  3. for each of the following events state the effect on...

Question: for each of the following events state the effect on...

Question details

For each of the following events, state the effect on the firm's market value of levered equity (E), market value of fixed-coupon debt (D ), market value of the firm’s levered assets (V) and systematic risk of the firm's levered assets measured using beta (βV).

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 columns here to answer in this table, you may have to scroll right to see them.

 

Market Value of Firm's Debt

Market Value of Firm's Equity

Share price

 

 

Number of shares

Market Value of the Firm’s Assets

Required return on assets or WACC before tax

 

(D)

(E)

(PShare)

(nshares)

(V)

(rV)

Issues bonds and invests the proceeds in the money market.

 

  

 

  

Conducts a 1 for 3 reverse stock split.

 

  

  

 

 

Buys a large over-priced farm with a beta of 0.5 for 10% more than its true market value, funded by cash.

 

  

Pays a cash dividend. Assume the ex-dividend date is the payment date.

 

Buys back (repays) bond liabilities.

  

  

 

Conducts a 3 for 7 rights issue at a subscription price equal to the pre-announcement market price.

 

  

The corona virus pandemic leads to forced shut downs and a collapse in sales.

 

 

anything

 

 

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