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Question 1046  leverage, capital structure, no explanation

A levered firm has only 2 assets on its balance sheet with the below market values and CAPM betas. The risk free rate is 3% pa and the market risk premium is 5% pa. Assume that the CAPM is correct and all assets are fairly priced.

Balance Sheet Market Values and Betas
Balance sheet item Market value ($m) Beta
Cash asset 0.5 0
Truck assets 0.5 2
Loan liabilities 0.25 0.1
Equity funding ? ?


The firm then pays off (retires) all of its loan liabilities using its cash. Ignore interest tax shields.

Which of the following statements is NOT correct? All answers are given to 6 decimal places. This event led to a: