JohnSmith maintains a debt-equity ratio of 0.85, and has an equity cost of capital of 12%...

JohnSmith maintains a debt-equity ratio of 0.85, and has an equity cost of capital of 12% and a debt cost of capital of 7%. The corporate tax rate is 40%, and its market capitalization is $220 million. a. If JohnSmith cash flow is expected to be $10 million in one year, what constant expected future growth rate is consistent with the firm’s current market value? b. Compute the value of interest tax shield

Expert Solution

Ans. (a) Expected Future Growth :- 5.96%

(b) Value of Interest Tax Shield :- $139.62 Million.

Detailed calculation & explanation attached below :-

jeff jeffy answered 1 year ago

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