00 Problem 16-21 Taxes and the Cost of Capital (LO2) Here are book- and market value balance sheets of the United Frypan Company (figures in $ millions): 10000ts Book-Value Balance sheet Net working capital $ 45 Debt Long-term assets 55 Equity $ 100 65 35 $ 100 $ Market-Value Balance Sheet Net working capital 45 Debt Long-term assets 190 Equity 5 235 65 170 $ 235 Assume that MM's theory holds except for taxes. There is no growth, and the $65 of debt is expected to be permanent. Assume a 21% corporate tax rate. D a. How much of the firm's market value is accounted for by the debt-generated tax shield? (Enter your answer in million rounded to 2 decimal places.) b. What is United Frypan's after-tax WACC if Toebt = 7.5% and fequity = 15.5%? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) 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 a borrowing rate of 7.5%. (Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places.) Answer is complete but not entirely correct. a. PV tax shield $ 13.65 million b. WACC 12.82 % c. New value of the firm $ 13.26 x million