Suppose Goodyear Tire and Rubber Company has an equity cost ofcapital of 8.4% a debt cost of capital of 6.9?%, a marginalcorporate tax rate of 35?%, and a? debt-equity ratio of 2.3. Assumethat 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 ofcapital is less than its equity cost of capital and higher than itsWACC.

A) The equity cost of capital exceeds the unlevered cost ofcapital because leverage makes the equity risk less than theoverall risk of the firm. The WACC is less than the unlevered costof capital because the WACC excludes the benefit of the interesttax shield.

B. The equity cost of capital exceeds the unlevered cost ofcapital because leverage makes the equity risk greater than theoverall risk of firm. The WACC is less than the unlevered cost ofcapital because the WACC includes the benefit of the interest taxshield.

C. The equity cost of capital exceeds the unlevered cost ofcapital because leverage makes the equity risk less than theoverall risk of the firm. The WACC is less than the unlevered costof capital because the WACC includes the benefit of the interesttax shield.

D. The equity cost of capital exceeds the unlevered cost ofcapital because leverage makes the equity risk greater than theoverall risk of the firm. The WACC is less than the unlevered costof capital because the WACC excludes the benefit of the interesttax shield.