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Here are book and market value balance sheets of the United Frypan Company (UF): Book Net working capital $ 40 $ 60 Debt Long-term assets

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

Book
Net working capital $ 40 $ 60 Debt
Long-term assets 100 80 Equity
$140 $140

Market
Net working capital $ 40 $ 60 Debt
Long-term assets 160 140 Equity
$200 $200

Assume that MM's theory holds with taxes. There is no growth, and the $60 of debt is expected to be permanent. Assume a 35% 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 $40 more and uses it to repurchase stock?

Increase in debt $

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