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 Flagstaff's after-tax WACC is closest to:

Question

Quizplus · Accepted Answer

First, we need to calculate the weighted cost of equity and debt:

Cost of Equity = 13%
Cost of Debt = (1-0.35) x 7% = 4.55%

Next, we need to calculate the weight of equity and debt:

Weight of Equity = 0.5
Weight of Debt = 1 - 0.5 = 0.5

Now, we can calculate the after-tax WACC:

WACC = (0.5 x 13%) + (0.5 x 4.55%) x (1-0.35) 
= 10.51%

Therefore, the closest answer choice is B) 10.51%.

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