Colton Lane Charlson

October 6, 2014
Managerial Finance
Assignment 6
Problem 18-4
Goodyears WACC = (1 / (1+2.6)) * 8.5%) + (2.6 / (1+2.6)) * 7%)) * (1 - .35) = 5.65%
V = (1.5 / (.0565 - .025)) = $47.6 Million
The divestiture would be profitable if Goodyear receives more than $47.6 million after tax.

Problem 18-5
a) Lucents WACC = (10.8 / 14.4) * 10%) + ((14.4 -10.8) * 6.1%) * (1 - .35) = 8.49%

b) V = (50 / 1.0849) + (100 / 1.0849^2) + (70 / 1.0849^3) = 185.86
Projects NVP is 185.86 -100 = 85.86

c) Lucents debt to value ratio is d = (14.4 10.8) / 14.4 = .25. The projects debt to
capacity is equal to d times the levered value of its remaining cash flow at each date.
Year 0 1 2 3
FCF -100 50 100 70
VL 185.86 151.64 64.52 0
D = d*VL 46.47 37.91 16.13 0

Problem 29-1
A corporation allows for separation of management and ownership. This creates a conflict of
interest between investors and managers of the corporation. This creates a need for a system of
checks and balances.

Problem 29-2
Examples of agency problems can be excessive perquisite. These can include the mixing of
personal and corporate life. An example of this is using corporate jets for family vacations. Other
agency problems are value destroying. These can occur when managers are not treating the
business as their own.

Problem 29-3
One advantage is that the corporate organizational form allows those who have the capital to
fund an enterprise to be different from those who have the expertise to manage the enterprise.
However this separation causes a disadvantage. The managers will act in their own best interests,
not in the best interests of the shareholders who own the firm.

Problem 29-10
No, the correct ownership level for one company may not be the correct level for another. There
is no simple relationship between ownership and performance. Some studies have shown a
nonlinear relationship between firm valuation and ownership. Increasing/ a lot of ownership in
the short term has shown to be good but eventually managers use their power to block efforts to
constrain them,


Colton Lane Charlson
October 6, 2014
Managerial Finance
Assignment 6
Problem 29-11
Proxy contests are elections for directors. In a contest two competing slates are proposed by the
company. If a board has become captured or unresponsive to shareholders, the shareholders
can put their own slate of new directions up for election. Essentially its a checks and balance
solution placed on the board of directors in order to make every act in the best interest.

Problem 29-12
A say on pay vote is a nonbinding vote where shareholders indicate whether they approve of an
executives pay package or not.

Problem 29-13
Whenever a board is confronted with dissident shareholders they can either ignore the
shareholder or negotiate. If the board decides to ignore the shareholder the shareholder could
launch a proxy fight. Each party would try and launch a campaign to kill the others support. If
the board decides to negotiate they can come together on something they both agree upon.