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 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 5%, and the expected return on the market is 11%. a. Using the information provided, complete the following table: Before change in capital structure After change in capital structure Debt-Equity Ratio 0 0.30 Debt Cost of Capital N/A 6.5% Equity Cost of Capital Weighted Average Cost of Capital
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 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 5%, and the expected return on the market is 11%. a. Using the information provided, complete the following table: Before change in capital structure After change in capital structure Debt-Equity Ratio 0 0.30 Debt Cost of Capital N/A 6.5% Equity Cost of Capital Weighted Average Cost of Capital
Fundamentals of Financial Management, Concise Edition (MindTap Course List)
9th Edition
ISBN:9781305635937
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Eugene F. Brigham, Joel F. Houston
Chapter13: Capital Structure And Leverage
Section: Chapter Questions
Problem 11P: RECAPITALIZATION Currently, Forever flowers Inc. has a capital structure consisting of 25% debt and...
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Transcribed Image Text:24. 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 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 5%, and the expected return on the market is 11%.
a. Using the information provided, complete the following table:
Before change in
capital structure
After change in
capital structure
Debt-Equity
Ratio
0
0.30
Debt Cost
of Capital
N/A
6.5%
Equity Cost
of Capital
Weighted Average
Cost of Capital
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.
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