24. Tax Shields and WACC. Here are book- and market-value balance sheets of the United Frypan Company:

Assume that MM's theory holds except for taxes. There is no growth, and the $40 of debt is expected to be permanent. Assume a 35% corporate tax rate. (LO2)

a. How much of the firm's value is accounted for by the debt-generated tax shield?

b. What is United Frypan's after-tax WACC if debt = 8% and equity = 15%?

c. Now suppose that Congress passes a law that eliminates the deductibility of interest for tax purposes after a grace period of 5 years. What will be the new value of the firm, other things equal? Assume an 8% borrowing rate.

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BOOK-VALUE BALANCE SHEET Net working capital $ 20 Debt $ 40 Long-term assets 80 Equity 60 $ 100 $ 100 Net working capital MARKET-VALUE BALANCE SHEET $ 20 Debt $ 40 Long-term assets 140 Equity 120 $ 160 $ 160