Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The...
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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 $1.46 million per year, growing at a rate of 2.3% per year. Goodyear has an equity cost of capital of 8.4%, a debt cost of capital of 6.7%, a marginal corporate tax rate of 32%, 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?
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