Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions): Book-Value
Question:
Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions):
Book-Value Balance Sheet
Net working capital
$
30
Debt
$
50
Long-term assets
70
Equity
50
$
100
$
100
Market-Value Balance Sheet
Net working capital
$
30
Debt
$
50
Long-term assets
185
Equity
165
$
215
$
215
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 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 ifrDebt= 6.8% andrEquity= 16.2%?(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 6.8%.(Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places.)
Expert Answer:
