Answer:
The correct option is B,correct annual cash flows to be used under WACC method is $640,000
Explanation:
Expected earnings before interest and tax is $900,000
interest expense on the 10% interest perpetual debt=10%*$1000,000=$100,000
earnings before tax=EBIT- interest expense=$900,000-$100,000=$800,000
earnings after tax=earnings before tax-tax expense
tax expense=earnings before tax*20%=$800,000*20%=$160,000
earnings after tax=$800,000-$160,000=$640,000
The correct amount of annual cash flow to be used under weighted average cost of capital method is $640,000 which after interest on debt and taxes have been deducted.
