Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of $1.50 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 7.0%, 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? A divestiture would be profitable if Goodyear received more than $ million after tax. (Round to one decimal place.)

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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A 17.

Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is
expected to generate free cash flows of $1.50 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 7.0%, 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?
A divestiture would be profitable if Goodyear received more than $
million after tax. (Round to one decimal place.)
Transcribed Image Text:Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of $1.50 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 7.0%, 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? A divestiture would be profitable if Goodyear received more than $ million after tax. (Round to one decimal place.)
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