Question

Restex has a debt-equity ratio of 0.99, an equity cost of capital
of 16%, and a debt cost of capital of 7%. Restex's corporate tax
rate is 30%, and its market capitalization is $287 million.

a. If Restex's free cash flow is expected to be $8 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.

Answer #1

**Answer)**

**PART A)**

**Given**

Debt-Equity ratio |
0.99 |

Equity cost of
capital |
16% |

Debt cost of capital |
7%. |

Tax |
30% |

Cash Flow |
$8 Million |

Market
capitalization |
$287 million. |

**WACC = [ 1 / 1.99 X 16% +
0.99 / 1.99 X 7% (1- 0.30)]**

**= 0.080 +
0.0248**

**=
10.48%**

**V ^{L} = E +
D**

**Which is 287 X
1.99**

**V ^{L} =
571.13**

**FCF / WACC - g =
571.13**

**8 / 0.1048 - g =
571.13**

**8 = 59.85 -
571.13g**

**51.85 =
571.13g**

**g =
9.07%**

**Therefore expected growth
is 9.07%**

**PART B)**

**Before Tax WACC = [ 1 /
1.99 X 16% + 0.99 / 1.99 X 7%]**

**= 0.080 +
0.034**

**= 11.4%**

**V ^{U} = FCF /
Before Tax WACC - g**

**= 8 / (0.114 -
0.0907)**

**= 8 /
0.0233**

**= $ 343.3
Million**

**Interest Tax Shiled =
571.13 - 343.3**

**= $227.83
Million**

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