Question
Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions): Book-Value Balance Sheet Net working capital $ 50 Debt
Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions):
Book-Value Balance Sheet | |||
Net working capital | $ 50 | Debt | $ 70 |
Long-term assets | 50 | Equity | 30 |
$ 100 | $ 100 |
Market-Value Balance Sheet | |||
Net working capital | $ 50 | Debt | $ 70 |
Long-term assets | 160 | Equity | 140 |
$ 210 | $ 210 |
Assume that MMs theory holds except for taxes. There is no growth, and the $70 of debt is expected to be permanent. Assume a 21% corporate tax rate.
How much of the firm's value is accounted for by the debt-generated tax shield?
Note: Enter your answer in million rounded to 2 decimal places.
What is United Frypans after-tax WACC if rDebt=6.3%Debt=6.3% and rEquity=16.7%Equity=16.7% ?
Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.
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 an 6.3% borrowing rate.
Note: Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places.
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