FIN515 Week6 Assignment
Week 6 Text Problems
Complete the following graded
homework assignment in a Word document named FIN515_Homework6_yourname. Show
the details of your calculation and work in your answer to the problems.
Problems (p. 662)
18-4 Weighted Average Cost of
Capital Method
18-5 Valuing a Project
Problems (pp. 983 and 984)
29-1, 2, 3, 10, 11, 12, and 13
18-4 Suppose
Goodyear Tire and Rubber Company is considering divesting one of its
manufacturing plants. The plant is expected to generate free cash flows of $1.5
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%, 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?
18-5 Suppose Alcatel-Lucent
has an equity cost of capital of 10%, market capitalization of $10.8 billion,
and an enterprise value of $14.4 billion. Suppose Alcatel-Lucent’s debt cost of
capital is 6.1% and its marginal tax rate is 35%.
a. What is Alcatel-Lucent’s 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?
c. If Alcatel-Lucent maintains
its debt-equity ratio, what is the debt capacity of the project in part b?
29-1. What inherent
characteristic of corporations creates the need for a system of checks on
manager behavior?
29-2 What are some examples
of agency problems?
29-3. What are the
advantages and disadvantages of the corporate organizational structure?
29-10. Is it necessarily true
that increasing managerial ownership stakes will improve firm performance?
29-11. How can proxy contests
be used to overcome a captured board?
29-12. What is a say-on-pay
vote?
29-13. What are a board’s
options when confronted with dissident shareholders?
TUTORIAL PREVIEW
29-13. What are a board’s
options when confronted with dissident shareholders?
When confronted with a
dissident shareholder, a board can:
1. Ignore the
shareholder, which will result in either the shareholder going away or
launching a proxy fight. In this case the board will need to expend resources
in an attempt to………………………………………and so on..
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