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Finance Questions




Question 1;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 2;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 70;c. If Alcatel-Lucent maintains its debt-equity ratio, what is the debt capacity of the project in part b?


Paper#81750 | Written in 18-Jul-2015

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