Estimate the cost of capital for the division

Assignment Help Financial Management
Reference no: EM132029300

In the face of disappointing earnings results and increas- ingly assertive institutional stockholders, Eastman Ko- dak was considering the sale of its health division, which earned $560 million in EBIT in the most recent year on revenues of $5.285 billion. The expected growth in earn- ings was expected to moderate to 6% for the next five years, and to 4% after that. Capital expenditures in the health division amounted to $420 million in the most re- cent year, whereas depreciation was $350 million. Both are expected to grow 4% a year in the long run. Working capital requirements are negligible.

The average beta of firms competing with Eastman Ko- dak’s health division is 1.15. Although Eastman Kodak has a debt ratio (D?[D + E]) of 50%, the health division can sustain a debt ratio (D?[D + E]) of only 20%, which is similar to the average debt ratio of firms competing in the health sector. At this level of debt, the health division can expect to pay 7.5% on its debt, before taxes. (The tax rate is 40%, market risk premium is 5.5%, and the Treasury bond rate is 7%.)

a) Estimate the cost of capital for the division.

b) Estimate the value of the division.

Reference no: EM132029300

Questions Cloud

How is default risk different from systematic risk : How do ratings and yields to maturity relate? How is default risk different from systematic risk?
Total cost and marginal cost : Complete the following table, where L is units of labor, Q is units of output, and MPL is the marginal product of labor.
Explain how to develop plan to leverage stakeholder diversty : Explain how to develop a plan to leverage Stakeholder diversity, Provide Real world examples
What is the best explanation for the genetic theory : What is the best explanation for the Genetic theory to explain alcohol addiction, what do you think offers the best explanation?
Estimate the cost of capital for the division : Estimate the cost of capital for the division. Estimate the value of the division.
Should the machine be? purchased : The? firm's tax rate is 35 ?%, and its? after-tax MARR is 15 ?%. Should the machine be? purchased?
Reflect on the story and message of this allegory : Read the Wikipedia description of "The Allegory of the Cave" and watch the video representation of this story.
What is the npv of installing the machinery : After 3 years (when the machine has only been depreciated for 3 years and therefore the book value is not zero) the machine is sold for $30,000
How would the researcher randomly select files : What does it mean to say the files were randomly selected? How would the researcher randomly select files? In other words, what does the process look like?

Reviews

Write a Review

Financial Management Questions & Answers

  Foreign company acquisition

Acquisition by a foreign company and the effects of that decision and the results of foreign exchange in Euro and the exchange rate differences.

  Financial management for profit and non profit organizations

In this essay, we are going to discuss the issues of financial management in a non-profit organisation.

  Method for estimating a venture''s value

Evaluate venture's present value, cash and surplus cash and basic venture capital.

  Replacement analysis

This document show the Replacement Analysis of modling machine. Is replacement give profit to company or not?

  Business finance task - capital budgeting

Your company is considering using the payback period for capital-budgeting. Discuss the advantages and disadvantages of this technique.

  Analysis of the investment

In this project, you will focus on one of these: the additional cost resulting from the purchase of an apple press (a piece of equipment required to manufacture apple juice).

  Conduct a what-if analysis

Review the readings and media for this unit, including the Anthony's Orchard case study media. Familiarise yourself with the Anthony's Orchard company and its current situation.

  Determine operational expenditures

Organisations' behaviour is guided by financial data. In the short term, such data will help determine operational expenditures; in the long term, historical data may help generate forecasts aimed at determining strategic plans. In both instances.

  Personal financial management

How much will you have left over each half year if you adopt the latter course of action?

  Sources of finance for expansion into new foreign markets

A quoted company is considering several long-term sources of finance for expansion into new foreign markets.

  Long term financial planning

This assignment is designed for analyze Long term financial planning begins with the sales forecast and the key input in the long term fincial planning.

  Explain the role of fincial manager

This assignment explain the role of fincial manager, function of manger. And what are the motives of financial manager.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd