Edison is currently an all-equity firm with an expected return of 12%. Edison's firm value is $500m....

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Edison iscurrently an all-equity firm with an expected return of 12%.Edison's firm value is $500m. It is considering a leveragedrecapitalization in which it would borrow and repurchase existingshares. Assume that there are no coporate taxes, no marketfrictions and no bankruptcy costs. Make sure to read all questionsbelow (4 questions each worth 15 points)
Q1 (15 points) SupposeEdison wants to borrow to the point that its debt-equity ratio is0.50. What is the value of the debt that is issued by Edison? Whatis the value of the remaining equity if the proceeds from the debtissuance are used to repurchase shares of commonstock?
Q2 (15 points) SupposeEdison wants to borrow to the point that its debt-equity ratio is0.50. With this amount of debt, the debt cost of capital will be6%. What will be the expected return of equity be after thistransaction?
Q3 (15 points) Supposeinstead that Edison borrows to the point that its debt-equity ratiois 1.50. With this amount of debt, Edison's debt will be muchriskiers. As a result, the debt cost of capital will be 8%. Whatwill be the expected return of equity in this case?
Q4 (15 points) A seniormanager argues that it is in the best interest of the shareholdersto choose the capital structure that leads to the highest expectedreturn for the stock. How would you respond to theargument?

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Edison iscurrently an all-equity firm with an expected return of 12%.Edison's firm value is $500m. It is considering a leveragedrecapitalization in which it would borrow and repurchase existingshares. Assume that there are no coporate taxes, no marketfrictions and no bankruptcy costs. Make sure to read all questionsbelow (4 questions each worth 15 points)Q1 (15 points)SupposeEdison wants to borrow to the point that its debt-equity ratio is0.50. What is the value of the debt that is issued by Edison? Whatis the value of the remaining equity if the proceeds from the debtissuance are used to repurchase shares of commonstock?Q2 (15 points)SupposeEdison wants to borrow to the point that its debt-equity ratio is0.50. With this amount of debt, the debt cost of capital will be6%. What will be the expected return of equity be after thistransaction?Q3 (15 points)Supposeinstead that Edison borrows to the point that its debt-equity ratiois 1.50. With this amount of debt, Edison's debt will be muchriskiers. As a result, the debt cost of capital will be 8%. Whatwill be the expected return of equity in this case?Q4 (15 points)A seniormanager argues that it is in the best interest of the shareholdersto choose the capital structure that leads to the highest expectedreturn for the stock. How would you respond to theargument?

Edison iscurrently an all-equity firm with an expected return of 12%.Edison's firm value is $500m. It is considering a leveragedrecapitalization in which it would borrow and repurchase existingshares. Assume that there are no coporate taxes, no marketfrictions and no bankruptcy costs. Make sure to read all questionsbelow (4 questions each worth 15 points)


Q1 (15 points)	SupposeEdison wants to borrow to the point that its debt-equity ratio is0.50. What is the value of the debt that is issued by Edison? Whatis the value of the remaining equity if the proceeds from the debtissuance are used to repurchase shares of commonstock?




Q2 (15 points)	SupposeEdison wants to borrow to the point that its debt-equity ratio is0.50. With this amount of debt, the debt cost of capital will be6%. What will be the expected return of equity be after thistransaction?




Q3 (15 points)	Supposeinstead that Edison borrows to the point that its debt-equity ratiois 1.50. With this amount of debt, Edison's debt will be muchriskiers. As a result, the debt cost of capital will be 8%. Whatwill be the expected return of equity in this case?




Q4 (15 points)	A seniormanager argues that it is in the best interest of the shareholdersto choose the capital structure that leads to the highest expectedreturn for the stock. How would you respond to theargument?