Question
SunTox (STX) is divesting from one of its manufacturing plants. The plant is expected to generate free cash flows of $2.0 million/year. Growing at a
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SunTox (STX) is divesting from one of its manufacturing plants. The plant is expected to generate free cash flows of $2.0 million/year. Growing at a rate of 2%/year. STX has an equity cost of capital of 9%; a debt cost of capital of 6.0%; a corporate tax rate of 25%; and a debt -to-equity ratio (D/E) of 2. If the plan has average risk and STX maintains a constant D/E ratio. What is the rwacc and the after-tax amount it must receive (VL) for the divestiture of STX to be profitable?
a. 6.0% and $50.0 million
b. 8.0% and $33.3 million
c. 8.0% and $50 million
d. 4.4% and $86.96 million
SunTox (STX) is divesting from one of its manufacturing plants. The plant is expected to generate free cash flows of $2.0 million/year. Growing at a rate of 2%/year. STX has an equity cost of capital of 9%; a debt cost of capital of 6.0%; a corporate tax rate of 25%; and a debt -to-equity ratio (D/E) of 2. If the plan has average risk and STX maintains a constant D/E ratio. What is the rwacc and the after-tax amount it must receive (VL) for the divestiture of STX to be profitable?
| a. | 6.0% and $50.0 million | |
| b. | 8.0% and $33.3 million | |
| c. | 8.0% and $50 million | |
| d. | 4.4% and $86.96 million |
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