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Problem 1 6 - 2 1 Taxes and the Cost of Capital ( LO 2 ) Here are book - and market - value balance

Problem 16-21 Taxes and the Cost of Capital (LO2)
Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions):
Assume that MM's theory holds except for taxes. There is no growth, and the $55 of debt is expected to be permanent. Assume a 21%
corporate tax rate.
a. 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.
b. What is United Frypan's after-tax WACC if rDebt=6.0% and rEquity=17.0%?
Note: 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 an 6.0% borrowing rate.
Note: Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places.
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