When the pension asset allocation changes which of the following is least likely to occur?
A) The equity beta will change while the total value of firm assets remains constant. B) The higher the investment in bonds in the pension assets the more debt the firm will need to issue to maintain the same overall level of risk in the firm’s capital structure. C) The total value of liabilities and equity stays the same even though the amount of equity capital changes.
Ans C?
When the pension asset allocation changes which of the following is least likely to occur?
A) The equity beta will change while the total value of firm assets remains constant.
Yes
B) The higher the investment in bonds in the pension assets the more debt the firm will need to issue to maintain the same overall level of risk in the firm’s capital structure.
Invst. in Bonds increases----BETA (a,p) decreases—BETA (a,t) decreases—to continue using the same WACC----company needs to issue debt & decrease equity…
yes
C) The total value of liabilities and equity stays the same even though the amount of equity capital changes.
No
not correct…
I just do the section qbank and recognize that i get below 50%
I would have chosen C as well.
but now you say its wrong, i guess A
equity Beta stays constant. weited avg equity beta is different.
answer is A and this is explaination…
The firm’s equity beta remains the same as the asset allocation in the pension assets changes but the total asset beta, equity capital, debt financing, and debt-to-equity ratio will all change. As the percentage of pension assets invested in equities increases the total asset beta will increase and to maintain the same equity beta the level of risk in the firm’s capital structure must decrease, thus the firm must issue more equity and reduce the amount of debt financing hence the debt-to-equity ratio will decrease.
???
if there’s a higher invst in bonds in the assets, then we know something needs to be done to match the additional risk exposure (duration…etc)…, so option B should be correct.
if asset allocation changes and becomes more risky, won’t the equity beta also change to reflect a more risky portfolio?
if asset allocation changes, then total value of liabilities and equity will stay the same…, so option C should be the right answer. No?
If all you’re doing is just change allocation, then total assets should stay the same, and both liability and equity should remain the same. No?
The question says which is the least likely to occur. Option C should be the least likely to occur because the amount of equity capital should not change.
if equity beta increases, then risk on left side of balance sheet increases
in order to “offset” this increase in risk, you must lower risk somewhere on the right side of the balance sheet
in order to reduce risk on right side, you must lower your D/E ratio, and you do this by reducing the ratio, which is by increasing equity (the denominator goes up, so the D/E ratio goes down), and/or by decreasing debt (which makes numerator decrease, so D/E goes down) which results in less risk on right side of balance sheet
so, you have more risk on left side, less risk on right side = no change in total risk
what is equity capital guys? , it seem a new concept to me
ok so, let’s assume the pension asset allocation changed by allocating more to bonds.
now, you have to match risk exposure in the capital structure - so option B will occur.
now, we know the total value of firm remains the same, but reallocation must be done to match risk of assets…, so equity capital and liability will change without affecting total value. - so option C will occur.
now, since asset allocation has changed, asset risk will also change. Couple this with option B will affect the risk of the equity. This should result in changes in the equity beta even though total value of firm remains the same. - so option A will occur. No?
Where am I going wrong here?
equity capital is the shareholder capital , in other words their contributions and net earnings after paying debt , cost of operations and taxes , depreciation , and other costs.
Damil
assets beta change when we change allocation of penstion fund, firm risk also change however the equity beta never change…
Now company has to rebalance the right side of balance sheet because of changing in beta of left side
to rebalance the right side, they have to issue new debts/stocks or pay debt or repurchase stock… -> total value of firm assets changes -> A incorrect
However, if they choose to converse debt to stock…total assets unchanged 
Now we play another case
To maintain the same equity beta after decreasing the percentage of pension assets invested in equities a firm would need to:
A) increase the amount of risk in its capital structure by using more equity capital. B) increase the amount of risk in its capital structure by using more debt financing. C) decrease the amount of risk in its capital structure by using less equity capital.
I hope this case will help us clear the issue of dif btw beta and risk…also thanks Jana
decrease on left side of B/S
so you need to increase risk on right side of B/S to remain same
increase risk by increasing D/E ratio
lower equity
increase debt
answer => B
great, just few seconds :))
Which of the following statements regarding the relationship between a domestic currency value and interest rates is most accurate?
A) An increase in short-term interest rates may increase or decrease the value of the domestic currency. B) An increase in short-term interest rates decreases the value of the domestic currency. C) An increase in short-term interest rates increases the value of the domestic currency.
C?
C, if it’s a real rate increase
IRP bites us in this case :))
Yeah, b if it’s just an increase of nominal rates due to inflation
A