Restex maintains a debt-equity ratio of 0.85, and has an equity cost of capital of 12% and a
cost of capital of 7%. Restex’s corporate tax rate is 40%, and its market capitalization is $220
a. If Restex’s free cash flow is expected to be $10 million in one year, what constant expected
future growth rate is consistent with the firm’s current market value?
b. Estimate the value of Restex’s interest tax shield.