Remex (RMX) currently has no debt in its capital structure. The beta of its equity is 1.42. For each year into the indefinite future, Remex's free cash flow is expected to equal $28 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 28% 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 6.11%. Remex faces a corporate tax rate of 15%. Except for the corporate tax rate of 15%, there are no market imperfections. Assume that the CAPM holds, the risk-free rate of interest is 4.7%, and the expected return on the market is 10.34%. a. Using the information provided, fill in the table below. 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. a. Using the information provided, fill in the table below. Using the information provided above, fill in the table below: (Round to three decimal places.) Debt Cost of Capital Equity Cost Weighted Average Cost of Capital of Capital N/A Before change in capital structure After change in capital structure Debt-Equity Ratio 0 0.28 6.11%
Remex (RMX) currently has no debt in its capital structure. The beta of its equity is 1.42. For each year into the indefinite future, Remex's free cash flow is expected to equal $28 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 28% 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 6.11%. Remex faces a corporate tax rate of 15%. Except for the corporate tax rate of 15%, there are no market imperfections. Assume that the CAPM holds, the risk-free rate of interest is 4.7%, and the expected return on the market is 10.34%. a. Using the information provided, fill in the table below. 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. a. Using the information provided, fill in the table below. Using the information provided above, fill in the table below: (Round to three decimal places.) Debt Cost of Capital Equity Cost Weighted Average Cost of Capital of Capital N/A Before change in capital structure After change in capital structure Debt-Equity Ratio 0 0.28 6.11%
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Remex (RMX) currently has no debt in its capital structure. The beta of its equity is 1.42. For each year into the indefinite future, Remex's free cash flow is expected to equal $28 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 28% 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 6.11%. Remex faces a corporate tax rate of 15%. Except for the corporate tax rate of 15%, there are no market imperfections.
Assume that the CAPM holds, the risk-free rate of interest is 4.7%, and the expected return on the market is 10.34%.
a. Using the information provided, fill in the table below.
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.
a. Using the information provided, fill in the table below.
Using the information provided above, fill in the table below: (Round to three decimal places.)
Debt Cost of
Capital
Equity Cost Weighted Average Cost
of Capital
of Capital
N/A
%
%
Before change in
capital structure
After change in
capital structure
Debt-Equity
Ratio
0
0.28
6.11%
%
%
(…)
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