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Debt-equity ratio forever

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Reference no: EM131206374

Remex(RMX) currently has no debt in its capital structure. The beta of its equity is 1.64.

For each year into the indefinite future, Remex's free cash flow is expected to equal $25 million. Remex is considering changing its capital structure by issuing debt and using the proceeds to buy back stock. It will do so in such a way that it will have a 25% debt-equity ratio after the change, and it will maintain this debt-equity ratio forever. Assume that Remex's debt cost of capital will be 6.24%.

Remex faces a corporate tax rate of 30%.

Except for the corporate tax rate of 30%, there are no market imperfections. Assume that the CAPM holds, the risk-free rate of interest is 4.8%, and the expected return on the market is 10.56%.(Round to three decimal places.) Using the information provided, fill in the table below. Using the information provided above, fill in the table below:

Debt-Equity Ratio

Debt Cost of Capital

Equity Cost of Capital

Weighted Average Cost of Capital

Before change in capital structure

0

N/A

%

%

After change in capital structure

0.25

6.24%

%

%

b. Using the information provided and your calculations in part (a), determine the value of the tax shield acquired by Remex if it changes its capital structure in the way it is considering. The value of the tax shield is $ million.  (Round to two decimal places.) Enter your answer in each of the answer boxes.

Reference no: EM131206374

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