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

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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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