Question
Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions): Book-Value Balance Sheet Net working capital $ 35 Debt
Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions):
Book-Value Balance Sheet Net working capital $ 35 Debt $ 55 Long-term assets 65 Equity 45 $ 100 $ 100
Market-Value Balance Sheet Net working capital $ 35 Debt $ 55 Long-term assets 170 Equity 150 $ 205 $ 205
Assume that MM's theory holds except for taxes. There is no growth, and the $55 of debt is expected to be permanent. Assume a 21% corporate tax rate.
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 rDebt = 7.7% and rEquity = 15.3%? (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 7.7%. (Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places.)
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