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Florida Citrus Inc. (FCI) estimates its taxable income at $9,000,000. The company is considering expanding its product line by introducing a low-calorie sport drink for next year. It expects that the additional taxable income next year from this sport drink will be $1,500,000.
a) How much will FCI pay in federal income taxes next year if it does not produce the low-calorie sport drink?
b) How much will FCI pay in federal income taxes next year if it produces the low-calorie sport drink?
c) What is the after-tax net income difference between producing the low-calorie sport drink and not producing the low-calorie sport drink?
Explain the theory behind the free cash flow valuation approach. Why are the free cash flows value relevant to common equity shareholders when they are not cash flows to those shareholders, but rather are cash flows into the firm?
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