Please give me answers in organized way. Edison Electric has $1 billion market c

Question

Please give me answers in organized way.

Edison Electric has $1 billion market capitalization, 10 million shares trading at S100/share. Currently, its equity beta is 1.8. It also has $0.5 billion (market value) of debt outstanding with a yield-to-maturity of 7%. The Treasury bill rate is 5% and the market risk premium is estimated at 8%. Edison's tax rate is 34%. Assume everything else in the perfect markets hold throughout your analysis. 1. What is Edison's current WACC? 114523 14d/. 2. What is the beta on Edison's current debt? 02H 3. What is the value of Edison's debt tax-shield, assuming the debt is always rolled over at the same level? 4. What is the value of Edison's unlevered cash flows? Suppose Edison announces that it is issuing S1 billion of new debt at 9% in order to retire the entire $0.5 billion of old debt (they will pay $0.5 billion for it) and to repurchase $0.5 billion of outstanding stock at market prices. 5. After the capital structure change, how has the value of interest tax shields changed? 6. Who captures this increase in value? What is the total market value of Edison's remaining shares? .0/S246(,haqP 7. what is the new stock price? Pr 6.34 (dox sh) D E

Explanation / Answer

Wd = 0.5 / (1+0.5) = 0.33

We = 1 - Wd = 1-0.33 = 0.67

Re = 5% + 1.8*8% = 19.4%

Rd = 7%

WACC = 0.33*7%*(1-0.34) + 0.67*19.4% = 14.53%

2)

Beta of Debt is 0. (Always)

3)

Tax shield = Interest * Tax rate = 0.5*0.07*0.34 = 0.0119 billion

4)

Value of unlevered cashflows = Value of equity = 1 billion

5)

Tax shield = Interest * Tax rate = 1*0.09*0.34 = 0.0306 billion

6)

Market value of remaining = 1 - 0.5 = 0.5 billion

7)

Stock price = Market value of remaining / Remaining shares

= 0.5 / 0.005 = 100

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