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Assume that capital markets are perfect except for the presence of taxes. Firm B has a market value of equity of $150 million and a market value of debt of $30 million. It is expected to keep its leverage ratio (D/(D+E)) constant. Its pre-tax cost of debt is 5%. Its marginal corporate tax rate is 20%. Firm B's first cash flow arrives next year and its expected free cash flow next year is $12 million. Its expected permanent growth rate of free cash flow is 2%.
(a) What is Firm B's WACC?
(b) What is the value of Firm B's interest tax shield?
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