# Question

Remex (RMX) currently has no debt in its capital structure. The beta of its equity is 1.50. 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 30% 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 6.5%. Remex faces a corporate tax rate of 35%. Except for the corporate tax rate of 35%, there are no market imperfections. Assume that the CAPM holds, the risk-free rate of interest is 5%, and the expected return on the market is 11%.

a. Using the information provided, complete the following table:

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 isconsidering.

a. Using the information provided, complete the following table:

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 isconsidering.

## Answer to relevant Questions

You are evaluating a project that requires an investment of $90 today and provides a single cash flow of $115 for sure one year from now. You decide to use 100% debt financing, that is, you will borrow $90. The risk-free ...Your firm is considering a $150 million investment to launch a new product line. The project is expected to generate a free cash flow of $20 million per year, and its unlevered cost of capital is 10%. To fund the investment, ...You would like to compare Ideko’s profitability to its competitors’ profitability using the EBITDA/sales multiple. Given Ideko’s current sales of $75 million, use the information in Table 19.2 to compute a range of ...Reproduce Ideko’s balance sheet and statement of cash flows, assuming Ideko’s market share will increase by 0.5% per year; investment, financing, and depreciation will be adjusted accordingly; and the projected ...It is September 13, 2012, and you own IBM stock. You would like to insure that the value of your holdings will not fall significantly. Using the data in Problem 3, and expressing your answer in terms of a percentage of the ...Post your question

0