FIN515 Finance Short notice Week 6, 13 accoutning problems

Student: Navin James Date: 2/10/17

Instructor: Curtis Woods Course: Managerial Finance Assignment: Week6 Problem Set

Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of million per year, growing at a rate of per year. Goodyear has an equity cost of capital of

, a debt cost of capital of , a marginal corporate tax rate of , and a debt-equity ratio of . If the plant has average risk and Goodyear plans to maintain a constant debt-equity ratio, what after-tax amount must it receive for the plant for the divestiture to be profitable?

$2.00 3.0% 9.0% 7.5% 40% 3.1

To calculate the WACC, use the following formula:

= +rwacc E

E + D rE

D E + D

rD × 1 − τc

Therefore,

= 0.09 + 0.075 ( ) = 0.0560rwacc 1

1 + 3.1 ×

3.1 1 + 3.1

× × 1 − 0.40

Goodyear's WACC is %.5.60

To compute the levered value of the plant, use the following formula:

=VL FCF

rwacc −g

Therefore,

= = $76.9 millionVL $2.00 million

0.0560 − 0.030

A divestiture would be profitable if Goodyear received more than $ million after tax. 76.9

Week6 Problem Set-Navin James https://xlitemprod.pearsoncmg.com/api/v1/print/en-us/finance

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