Remex (RMX) currently has no debt in its capital structure. The beta of its equity is 1.44. For each year into the indefinite future, Remex's free cash flow is expected to equal $26 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 6.37%. 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 4.9%, and the expected return on the market is 10.78%. 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. Question content area bottom Part 1 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-Equity Ratio Debt Cost of Capital Equity Cost of Capital Weighted Average Cost of Capital Before change in capital structure 0 N/A enter your response here% enter your response here% After change in capital structure 0.25 6.37% enter your response here% enter your response here%
Remex (RMX) currently has no debt in its capital structure. The beta of its equity is 1.44. For each year into the indefinite future, Remex's free cash flow is expected to equal $26 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 6.37%. 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 4.9%, and the expected return on the market is 10.78%. 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. Question content area bottom Part 1 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-Equity Ratio Debt Cost of Capital Equity Cost of Capital Weighted Average Cost of Capital Before change in capital structure 0 N/A enter your response here% enter your response here% After change in capital structure 0.25 6.37% enter your response here% enter your response here%
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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Question
Remex (RMX) currently has no debt in its capital structure. The beta of its equity is
free cash flow is expected to equal
CAPM holds, the risk-free rate of interest is
1.44.
For each year into the indefinite future, Remex's $26
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
6.37%.
Remex faces a corporate tax rate of
15%.
Except for the corporate tax rate of
15%,
there are no market imperfections. Assume that the 4.9%,
and the expected return on the market is
10.78%.
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.Question content area bottom
Part 1
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-Equity Ratio
|
Debt Cost of Capital
|
Equity Cost of Capital
|
Weighted Average Cost of Capital
|
|---|---|---|---|---|
|
Before change in capital structure
|
0
|
N/A
|
enter your response here%
|
enter your response here%
|
|
After change in capital structure
|
0.25
|
6.37%
|
enter your response here%
|
enter your response here%
|
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