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Suppose Goodyear Tire and Rubber Company has an equity cost of capital of 85 a debt cost of capital of 71 a marginal corporate tax rate of 33 and a debt equity ratio of 24 Assume that Good

Suppose Goodyear Tire and Rubber Company has an equity cost of capital of 8.5%, a debt cost of capital of 7.1%, a marginal corporate tax rate of 33%, and a debt-equity ratio of 2.4. Assume that 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.

Jun 09 2021 View more View Less

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