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Flagstaff Enterprises has an equity cost of capital of 13%, a debt cost of capital of 7%, and a corporate tax rate of 35%. At
Flagstaff Enterprises has an equity cost of capital of 13%, a debt cost of capital of 7%, and a corporate tax rate of 35%. At present, Flagstaff has a 0.80 debt-equity ratio and plans to maintain it (at 0.80) in the future. Flagstaff expects to have a 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 (forever).
a) Calculate the value of Flagstaff's interest tax shield.
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