port management Qs management, allocation, investment, following

gjcxc

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.

genuinecfa

Yeah, b if it’s just an increase of nominal rates due to inflation

dontknow1987

IRP bites us in this case )

Makavelim3

C, if it’s a real rate increase

spartanag07

great, just few seconds )

pawn

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

RMontgomery

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.

ruchita

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?

anshultongia

what is equity capital guys? , it seem a new concept to me

DarienHacker

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