Question

Rochester Industries expects free cash flow to the firm (FCFF) in the coming year of 300 million Canadian dollars ($). The company maintains an all-equity capital structure, and Rochester's required rate of return on equity is 8 percent. For the purposes of this problem, you can assume that FCFF will grow forever at a rate of 3 percent. Rochester Industries has 100 million outstanding common shares. Rochester's common shares are currently trading in the market for $60 per share.

Required:
a. If Rochester Industries’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

Answer 1

Step-by-step explanation:

a. 10.8512%7% 10.408.42%1.851.85102201.854070.0842100.08425.96%407LWACCFCFVEDWACCggg

b. 10.85pretax WACC12%7%9.70%1.851.85FCF10$267 millionpretax WACC0.09700.0596PVInterest Tax Shield407267$140 millionUVg