Here are book- and market-value balance sheets of the United Frypan Company: Book-Value Balance Sheet Net working
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Question:
Here are book- and market-value balance sheets of the United Frypan Company:
Book-Value Balance Sheet Net working capital $ 35 Debt $ 40 Long-term assets 65 Equity 60 $ 100 $ 100
Market-Value Balance Sheet Net working capital $ 35 Debt $ 40 Long-term assets 190 Equity 185 $ 225 $ 225
Assume that MM's theory holds except for taxes. There is no growth, and the $40 of debt is expected to be permanent. Assume a 37% corporate tax rate.
a. How much of the firm's market value is accounted for by the debt-generated tax shield?
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