Question

Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of

$1.68 million per​ year, growing at a rate of 2.6% per year. Goodyear has an equity cost of capital of 8.6%​, a debt cost of capital of 7.1%​,

a marginal corporate tax rate of35%​,and a​ debt-equity ratio of 2.8.

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?

A divestiture would be profitable if Goodyear received more than $(BLANK)million after tax.  ​(Round to one decimal​ place.)

Answer 1

the the plant using We can compute the levered value of WACC method Goodyear's WACC is IWAL E DIE (re) + D DEE (rd) (1.) WAC where, Tę = 8:6%, 8d=7:17, t=357. 0% 0:35, DIE = 2-86) Twee = *867+ 28._ * 7:47.61-0-35) 2-3+1 2.8+1 8.6 3.8 2.8 & 4.615 + WAC 3.8 SWAC - 2.26+ 3.40 VWAL= 5.66% Therefore, vt = FCF twaig where, FCF = $1.68 million, borwa = 5-667, 9= 26/ VA 1-68 00566-0-026 = 1.6 = $54.9 million 0.0306 :A divestiture would be profitable if Goodyear received more than $54°9 million after tax.