Use the Information for the Question(s) Below

question 28

Multiple Choice

Use the information for the question(s) below.
Flagstaff Enterprises is 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.
-If Flagstaff currently maintains a .5 debt to equity ratio,then Flagstaff's after-tax WACC is closest to:

• A) 10.00%
• B) 10.20%
• C) 9.50%
• D) 8.75%

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Definitions:

Asset

An economic resource owned or controlled by an entity that is expected to provide future economic benefits.

Income Summary

An account in the ledger that aggregates all the revenues and expenses for the period, used to transfer net income or loss to owner's equity.

Merchandise Inventory

Goods a company holds for the purpose of sale to customers.

Unearned Rent

Unearned Rent is a liability representing rent payments received in advance for which the services have yet to be rendered or the occupancy period has not yet occurred.