Remex? (RMX) currently has no debt in its capital structure. The beta of its equity is 1.12. For each year into the indefinite? future, Remex's free cash flow is expected to equal ?$23million. Remex is considering changing its capital structure by issuing debt and using the proceeds to buy back stock. It will do so in such a way that it will have a 33?% ?debt-equity ratio after the? change, and it will maintain this? debt-equity ratio forever. Assume that? Remex's debt cost of capital will be 7.02%. Remex faces a corporate tax rate of 25?%. Except for the corporate tax rate of 25?%, there are no market imperfections. Assume that the CAPM? holds, the? risk-free rate of interest is
5.4?%, and the expected return on the market is 11.88?%.
a. Using the information? provided, fill in the table below.
Debt-Equity Debt Cost of Equity Cost Weighted Average
Ratio Capital of Capital Cost of Capital
Before change in 0 N/A ??% ??%
Capital structure
After change in 0.33 7.02% ??% ??%
b. Using the information provided and your calculations in part ?(a?), determine the value of the tax shield acquired by Remex if it changes its capital structure in the way it is considering.
The value of the tax shield is ?$__ million. ( Round to two decimal places)