Suppose Goodyear Tire and Rubber Company 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. Suppose Goodyear maintains a constant debt-equity ratio. a. What is Goodyear’s WACC? b. What is Goodyear’s unlevered cost of capital?
One of the interesting debates on the agency problem is whether or not the potential problem increases efficiency and economic value. For example, often when debating corporate jets, the argument is made that the jets increase efficiency of the company executives by saving time. Overall, you find most agree that corporate jets waste money and are a potential abuse of the agency problem. For you, what would be the determining factors in determining if something represents a potential agency problem or not. For example, would you be concerned about excessive consumption (jets) or value-destroying (as with certain acquisitions)?