A firm that has a beta of 1.5 has two divisions: a printing division and a divis
ID: 2625825 • Letter: A
Question
A firm that has a beta of 1.5 has two divisions: a printing division and a division that manufactures computer chips. It also has $7B in equity and $3B in risk-less debt. A firm decides to issue $3B in equity and use the proceeds to pay down all of its debt (so that the new equity value is $10B and new debt value is $0). If there is no other change to the firm, which of the following is FALSE?
A
The beta of the firm remains the same.
The expected return on the firm's equity increases.
C.The riskiness of the firm's computer chip division remains the same.
D. The beta of the firm's equity decreases.
The beta of the firm remains the same.
B.The expected return on the firm's equity increases.
C.The riskiness of the firm's computer chip division remains the same.
D. The beta of the firm's equity decreases.
Explanation / Answer
A The beta of the firm remains the same. is false as this decreases
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