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Finance Problems P.662 - Goodyear Tire and Rubber Company




Question;Problems (p. 662);Question 4: Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of $1.5 million per year, growing at a rate of 2.5% per year. Goodyear has an equity cost of capital of 8.5%, a debt cost of capital of 7%, a marginal corporate tax rate of 35%, and a debt-equity ratio of 2.6. 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?;Question 5. Suppose Alcatel-Lucent has an equity cost of capital of 10%, market capitalization of $10.8 billion, and an enterprise value of $14.4 billion. Suppose Alcatel-Lucent?s debt cost of capital is 6.1% and its marginal tax rate is 35%.;a. What is Alcatel-Lucent?s WACC?;b. If Alcatel-Lucent maintains a constant debt-equity ratio, what is the value of a project with average risk and the following expected free cash flows?;Year;0;1;2;3;FCF;?100;50;100;70c. If Alcatel-Lucent maintains its debt-equity ratio, what is the debt capacity of the project in part b.?;Problems (pp. 983 and 984).;1. What inherent characteristic of corporations creates the need for a system of checks on manager behavior?;2. What are some examples of agency problems?;3. What are the advantages and disadvantages of the corporate organizational structure?;10. Is it necessarily true that increasing managerial ownership stakes will improve firm performance?;11. How can proxy contests be used to overcome a captured board?;12. What is a say-on-pay vote?;13. What are a board?s options when confronted with dissident shareholders?


Paper#50284 | Written in 18-Jul-2015

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