Restex 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%. Restex’s corporate tax rate is 25%, and its market capitalization is

$220 million.

a. If Restex’s free 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. Estimate the value of Restex’s interest tax shield.

Appendix