Question

# Restex has a​ debt-equity ratio of 0.62​, an equity cost of capital of 14%​, and a...

Restex has a​ debt-equity ratio of 0.62​, an equity cost of capital of 14%​, and a debt cost of capital of 11%. ​Restex's corporate tax rate is 30%​, and its market capitalization is \$163 million.

a. If​ Restex's free cash flow is expected to be \$3 million one year from now and will grow at a constant​ rate, what expected future growth rate is consistent with​ Restex's current market​ value?

b. Estimate the value of​ Restex's interest tax shield.

WACC = Cost of Equity * Weight of Equity + Cost of Debt after tax * Weight of Equity

= 14% * 1 / 1.62 + 11* (1-0.30) * 0.62 / 1.62

= 11.59%

Value of Levered Firm = 163 mn * 1.62 = 264.06 mn

OR

Value of Levered Firm = FCF / WACC - G

264.06 = 3 / 0.1159 - G

264.06 * 0.1159 - 264.06 * G = 3

G = 30.604554 - 3 / 264.06

G = 10.45%

b)

Value of Tax Shield is calculated by difference of Levered Value of Firm at WACC pre tax  and post tax

Pretax WACC = Cost of Equity * Weight of Equity + Cost of Debt after tax * Weight of Equity

= 14% * 1 / 1.62 + 11 * 0.62 / 1.62

= 12.85%

Value of levered Firm = FCF / Pre tax WACC - G

= 3 / 0.1285 - 0.1045

= 125 mn

Tax Shield = 264.06 - 125 = 139.06 mn