Question
Here are book- and market-value balance sheets of the United Frypan Company: Book-Value Balance SheetNet working capital$30Debt$50Long-term assets70Equity50$100$100 Market-Value Balance SheetNet working capital$30Debt$50Long-term assets160Equity140$190$190 Assume
Here are book- and market-value balance sheets of the United Frypan Company:
Book-Value Balance SheetNet working capital$30Debt$50Long-term assets70Equity50$100$100
Market-Value Balance SheetNet working capital$30Debt$50Long-term assets160Equity140$190$190
Assume that MM's theory holds except for taxes. There is no growth, and the $50 of debt is expected to be permanent. Assume a 31% corporate tax rate.
a.How much of the firm's market value is accounted for by the debt-generated tax shield?
b.What is United Frypan's after-tax WACC ifrDebt= 7.8% andrEquity= 15.2%?(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 7.8%.(Do not round intermediate calculations. Round your answer to 2 decimal places.)
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