In the face of disappointing earnings results and increasingly assertive institutional stockholders,

In the face of disappointing earnings results and increasingly assertive institutional stockholders, Eastman Kodak was considering a major restructuring in 1993. As part of this restructuring, it was considering the sale of its health division, which earned $560 million in earnings before interest and taxes in 1993, on revenues of $5.285 billion. The expected growth in earnings was expected to moderate to 6% between 1994 and 1998, and to 4% after that. Capital expenditures in the health division amounted to $420 million in 1993, while depreciation was $350 million. Both were expected to grow 4

»In the face of disappointing earnings results and increasingly assertive institutional stockholders, Eastman Kodak was considering a major restructuring in 1993. As part of this restructuring, it was considering the sale of its health division, which earned $560 million in earnings before interest and taxes in 1993, on revenues of $5.285 billion. The expected growth in earnings was expected to moderate to 6% between 1994 and 1998, and to 4% after that. Capital expenditures in the health division amounted to $420 million in 1993, while depreciation was $350 million. Both were expected to grow 4% a year in the long term. Working capital requirements were negligible. The average beta of firms competing with Eastman Kodak’s health division was 1.15. While Eastman Kodak had a debt ratio [D/(D + E)] of 50%, the health division could sustain a debt ratio [D/(D + E)] of only 20%, which was similar to the average debt ratio of firms competing in the health sector. At this level of debt, the health division could expect to pay 7.5% on its debt, before taxes. (The tax rate was 40%, the Treasury bond rate was 7%, and the risk premium was 5.5%.) a. Estimate the cost of capital for the division. b. Estimate the value of the division. c. Why might an acquirer pay more than this estimated value for the division?

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