Question 1

You are trying to estimate the levered beta for Zone Enterprises, a company that operates in the retail and advertising businesses, and you have calculated the following for the company:

Advertising	900	1.2
Retail	600	0.8
Cash	?

The company has $500 million in cash and marketable securities, and has 80 million shares, trading at $20/share. You can assume a tax rate of 40%.

Estimate the levered beta for the equity in Zone, given its current structure. Calculate the current WACC with ERP 5.5%, risk free rate 1.5% and default risk of 1.0%.

Now assume that Zone plans to sell half of its retail business for fair value and then use 75% of its cumulated cash (cash balance+ cash from asset sale) to pay a special dividend, and 25% to retire debt. Estimate the levered beta, WACC, and change in the value of the company after the transaction. Default risk will not change after the transaction.

1. What is the Old WACC? we calculated in Class - use 3 decimals and the % sign
2. What is the new weighted unlevered beta?
3. What is the new levered beta?
4. What is the NEW WACC? use 3 decimals and the % sign
5. What is the change in company value?