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
Get Answers For Free
Most questions answered within 1 hours.