Acme Storage has a market capitalization of $100 million and debt outstanding of $40 million. Acme plans

Question:

Acme Storage has a market capitalization of $100 million and debt outstanding of $40 million. Acme plans to maintain this same debt-equity ratio in the future. The firm pays an interest rate of 7.5% on its debt and has a corporate tax rate of 35%.

a. If Acme’s free cash flow is expected to be $7 million next year and is expected to grow at a rate of 3% per year, what is Acme’s WACC?

b. What is the value of Acme’s interest tax shield?

Free Cash Flow
Free cash flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. Unlike earnings or net income, free cash flow is a measure of profitability that excludes the...