Question: In the face of disappointing earnings results and increasingly assertive

In the face of disappointing earnings results and increasingly assertive institutional stockholders, Eastman Kodak was considering the sale of its health division, which earned $560 million in EBIT in the most recent year on revenues of $5.285 billion. The expected growth in earnings was expected to moderate to 6% for the next five years, and to 4% after that. Capital expenditures in the health division amounted to $420 million in the most recent year, whereas depreciation was $350 million. Both are expected to grow 4% a year in the long run. Working capital requirements are negligible.
The average beta of firms competing with Eastman Kodak’s health division is 1.15. Although Eastman Kodak has a debt ratio (D∕[D + E]) of 50%, the health division can sustain a debt ratio (D∕[D + E]) of only 20%, which is similar to the average debt ratio of firms competing in the health sector. At this level of debt, the health division can expect to pay 7.5% on its debt, before taxes.(The tax rate is 40%, and the Treasury bond rate is 7%.)
a. Estimate the cost of capital for the division.
b. Estimate the value of the division.

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  • CreatedApril 15, 2015
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