Here are book and market value balance sheets of the United Frypan Company (UF):

Book Value Balance SheetNet working capital $30 $50

DebtLong-term assets 90 70

Equity $120 $120

Market Value Balance SheetNet working capital $30 $50

DebtLong-term assets 150 130

Equity$180$180

Assume that MM's theory holds with taxes. There is no growth, and the $50 of debt is expected to be permanent. Assume a 40% corporate tax rate.

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

PV tax shield$

b.How much better off will UF's shareholders be if the firm borrows $30 more and uses it to repurchase stock?

Increase in equity value$