Flagstaff Enterprises is expected to have free cash flows in the coming year of $8 million, and this free cash flow is expected to grow at a rate of 3% per year thereafter. Flagstaff has an equity cost of capital of 13%, a debt cost of capital of 7%, and is in the 35% corporate tax bracket.
(a) If Flagstaff maintains a .5 debt to equity ratio, then Flagstaff’s pre-tax WACC is closest to:
(1) 10.5%
(2) 11.0%
(3) 9.0%
(4) 10.0%
(b) If Flagstaff currently maintains a .5 debt to equity ratio, then the value of Flagstaff as an all equity firm would be closest to:
(1) $80 million
(2) $100 million
(3) $73 million
(4) $115 million
(c) If Flagstaff currently maintains a .5 debt to equity ratio, then Flagstaff’s after-tax WACC is closest to:
(1) 10%
(2) 10.25%
(3) 9.50%
(4) 8.75%
(d) If Flagstaff currently maintains a .5 debt to equity ratio, then the value of Flagstaff as a levered firm is closest to: (1) $114 million
(2) $100 million
(3) $111 million
(4) $140 million
(e) If Flagstaff currently maintains a .5 debt to equity ratio, then the value of Flagstaff’s interest tax shield is closest to:
(1) $11 million
(2) $18 million
(3) $10 million
(4) $24 million