Fortune Inc. expects to have Free Cash Flow (FCF) in the coming year of $4 million, and its FCF is expected to grow at 5% per year thereafter.

The company has a cost of equity of 10% and a cost of debt of 6%. Itpays a corporate tax rate of 40%. The company maintains a constant debt-equity ratio of 0.8.

Required:

(a) Determine the value of the interest tax shield of Fortune Inc.

(b) Suppose Fortune Inc. revises its estimate of the expected Free Cash Flow

(FCF) in the coming year to be $3.8 million. Both estimates of themarket

value of the firm and the after tax Weighted Average of Capital (WACC)

remain unchanged. Re-estimate the companys constant expected future

growth rate.

(c) Explain the meaning of the Free Cash Flow (FCF).