5 Reliable Corp. currently has expected FCFs of $40 million per year, which are expected to continue forever. The first cash flow will occur one year from today. The firm has committed to a capital structure where they pay a fixed percentage of FCFs out as interest payments to debt holders. As a result, the firm’s D/E ratio will stay constant throughout the life of the project. The firm’s unlevered cost of capital (ru) is 12%, and its cost of debt is 5%. The corporate tax rate is 50%. You’ve been asked to value the company, and have concluded that the firm’s WACC is 10%.
a. What is the value of the firm’s debt tax shield?
b. What percentage of the FCFs has the firm decided to pay out to debt holders?
c. What is the firm’s debt-equity ratio?