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Flagstaff Enterprises expected to have free cash flow 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 it is in the 35% corporate tax bracket. Flagstaff maintains a constant debt-to-equity ratio of 0.5. Assume that capital markets are perfect except for the existence of corporate taxes.   a)What is Flagstaff's after-tax WACC?   b)What is the value of Flagstaff as a levered firm?   c)What is the value of Flagstaff's interest tax shield?   d)Briefly discuss the trade-off theory. What is the optimal capital structure according to the trade-off theory

Flagstaff Enterprises expected to have free cash flow 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 it is in the 35% corporate tax bracket. Flagstaff maintains a constant debt-to-equity ratio of 0.5. Assume that capital markets are perfect except for the existence of corporate taxes.   a)What is Flagstaff's after-tax WACC?   b)What is the value of Flagstaff as a levered firm?   c)What is the value of Flagstaff's interest tax shield?   d)Briefly discuss the trade-off theory. What is the optimal capital structure according to the trade-off theory

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Flagstaff Enterprises expected to have free cash flow 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 it is in the 35% corporate tax bracket. Flagstaff maintains a constant debt-to-equity ratio of 0.5. Assume that capital markets are perfect except for the existence of corporate taxes.

 

a)What is Flagstaff's after-tax WACC?

 

b)What is the value of Flagstaff as a levered firm?

 

c)What is the value of Flagstaff's interest tax shield?

 

d)Briefly discuss the trade-off theory. What is the optimal capital structure according to the trade-off theory? 

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