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.

1. What is Flagstaff's after-tax WACC?

2. What is the value of Flagstaff as a levered firm?

3. What is the value of Flagstaff's interest tax shield?

(3 marks)