Question
Please help with these questions Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions): Book-Value Balance Sheet Net
Please help with these questions
Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions):
| Book-Value Balance Sheet | |||||
| Net working capital | $ | 55 | Debt | $ | 75 |
| Long-term assets | 45 | Equity | 25 | ||
| $ | 100 | $ | 100 | ||
| Market-Value Balance Sheet | |||||
| Net working capital | $ | 55 | Debt | $ | 75 |
| Long-term assets | 210 | Equity | 190 | ||
| $ | 265 | $ | 265 | ||
Assume that MMs theory holds except for taxes. There is no growth, and the $75 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? answer in million rounded to 2 decimal places.
b. What is United Frypans after-tax WACC if rDebt = 7.3% and rEquity = 15.7%? 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 7.3%. answer in million rounded to 2 decimal places.
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Research In Finance
Authors: John W. Kensinger
1st Edition
0857245414, 978-0857245410
