Suppose Goodyear Tire and Rubber Company has an equity cost of capital of 9%, a debt cost of capital of 7.5%, a marginal corporate tax rate of 45%, and a debt-equity ratio of 2.7.

Suppose Goodyear maintains a constant debt-equity ratio.

a. What is Goodyear’s WACC?

b. What is Goodyear’s unlevered cost of capital?

c. Explain, intuitively, why Goodyear’s unlevered cost of capital is less than its equity cost of capital and higher than its WACC.

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