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's interest tax shield is closest to:

Question

Quizplus · Accepted Answer

The interest tax shield is the amount of taxes saved due to the deductibility of interest expense. The interest tax shield is calculated as the product of the debt-to-equity ratio, the cost of debt, and the corporate tax rate. In this case, the debt-to-equity ratio is 0.5, the cost of debt is 7%, and the corporate tax rate is 35%. Therefore, the interest tax shield is 0.5 * 0.07 * 0.35 = $0.07 million.

Use the Information for the Question(s)below