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Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of million
Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of million per year, growing at a rate of per year. Goodyear has an equity cost of capital of a debt cost of capital of a marginal corporate tax rate of and a debtequity ratio of If the plant has average risk and Goodyear plans to maintain a constant debtequity ratio, what aftertax amount must it receive for the plant for the divestiture to be profitable? Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of $ million per year, growing at a rate of per year. Goodyear has an equity cost of capital of a debt cost of capital of a marginal corporate tax rate of and a debtequity ratio of If the plant has average risk and Goodyear plans to maintain a constant debtequity ratio, what aftertax amount must it receive for the plant for the divestiture to be profitable?
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In year AMC will earn $ comma before interest and taxes. The market expects these earnings to grow at a rate of per year. The firm will make no net investmentsie capital expenditures will equal depreciation or changes to net working capital. Assume that the corporate tax rate equals Right now, the firm has $ comma in riskfree debt. It plans to keep a constant ratio of debt to equity every year, so that on average the debt will also grow by per year. Suppose the riskfree rate equals and the expected return on the market equals The asset beta for this industry is
a If AMC were an allequity unlevered firm, what would its market value be
b Assuming the debt is fairly priced, what is the amount of interest AMC will pay next year? If AMC's debt is expected to grow by per year, at what rate are its interest payments expected to grow?
c Even though AMC's debt is risklessthe firm will not default the future growth of AMC's debt is uncertain, so the exact amount of the future interest payments is risky. Assuming the future interest payments have the same beta as AMC's assets, what is the present value of AMC's interest tax shield?
d Using the APV method, what is AMC's total market value, V Superscript L What is the market value of AMC's equity?
e What is AMC's WACC? Hint: Work backward from the FCF and V Superscript L
f Using the WACC, what is the expected return for AMC equity?
g Show that the following holds for AMC: beta Subscript Upper A Baseline equals StartFraction Upper E Over Upper D plus Upper E EndFraction beta Subscript Upper E Baseline plus StartFraction Upper D Over Upper D plus Upper E EndFraction beta Subscript Upper D
h Assuming that the proceeds from any increases in debt are paid out to equity holders, what cash flows do the equity holders expect to receive in one year? At what rate are those cash flows expected to grow? Use that information plus your answer to part f to derive the market value of equity using the FTE method.
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