Suppose Goodyear Tire and Rubber Company is considering selling one of its manufacturing plants. The plant is expected to generate free cash flows of $1.64 million per year, growing at a rate of 2.4% per year. Goodyear has a cost of equity capital of 8.5%, a cost of debt capital of 6.7%, a marginal corporate tax rate of 32%, and a debt-to-equity ratio of 2.8. If the plant is average risk and Goodyear plans to maintain a constant debt-to-equity ratio, how much after-tax amount must the plant receive to make the sale profitable?

A sale would be profitable if Goodyear received more than

2-

Assume that Alcatel-Lucent has a cost of equity capital of 9.4% of market capitalization of $11.52 billion and an enterprise value of

$16 billion with a cost of debt capital of 6.2% and its marginal tax rate is 37%

to. What is the Alcatel-Lucent 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 ($ million)	negative 100	51	102	72

C. If Alcatel-Lucent maintains its debt-to-equity ratio, what is the borrowing capacity of the project in part ( b )?

Answer rating: 100% (QA)

Question 1 To determine how much aftertax amount the plant must receive to make the sale profitable we need to calculate the present value of the expected free cash flows generated by the plant and co... View the full answer