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