1. 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%. Restexs corporate tax rate is 40%, and its market capitalization is $220 million.

a. If Restexs free cash flows are expected to be $10 million in one year, what constant expected future growth rate is consistent with the firms current market value?

b. Estimate the value of Restexs interest tax shield by comparing the levered firm value with the firm value without leverage.

2. Markum Enterprises is considering permanently adding $100 million of debt to its capital structure. Markums corporate tax rate is 35%.

a. If investors pay a personal income tax rate of 40% on interest income, and a tax rate of 20% on income from dividends and capital gains, what is the value of the interest tax shield from the new debt?