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Can anyone help in answering this question by giving step by step solution? Flagstaff Enterprises expected to have free cash flow in the coming year
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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 currently uses 100% equity, and the equity cost of capital is 13%. The firm is now considering changing its capital structure. If Flagstaff plans to keep interest expenses constant in the future at a level of $0.5 million, what is the vlaue of the firm? Assume the firm is in the 35% corporate tax bracket, and risk free rate is 3%. Hint: use risk free rate to calcalate the PV of interst tax shield under fixed interest expense policy. A. $96.7 million OB $19.59 million OC. $5.36 million OD $85.8 million
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