Use the Information for the Question(s)below

question 68

Multiple Choice

Use the information for the question(s) below.
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 has a 35% corporate tax rate.
-If Flagstaff currently maintains a .5 debt to equity ratio,then the value of Flagstaff as an all-equity firm would be closest to:

• A)$80 million.
• B)$100 million.
• C)$73 million.
• D)$115 million.

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Definitions:

Sensitivity

The degree to which the price of a derivative, investment, or portfolio changes in response to changes in market conditions or underlying variables.

Supply Shock

An unexpected event that suddenly changes the supply of a product or commodity, resulting in a sudden change in its price.

Demand Shock

An unexpected event that causes a sudden increase or decrease in demand for goods or services in an economy.

Imported Oil

Oil that is brought into a country from foreign sources for use as a fuel or raw material.