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Restex Maintains A Debtequity Ratio Of 0 85 And Has An Equity Cost Of Capital Of 12% And A

Question

Restex maintains a debt-equity ratio of 0.85, and has an equity cost of capital of 12% and a

debt

cost of capital of 7%. Restex’s corporate tax rate is 40%, and its market capitalization is $220

million.

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.

Finance