River Cruises is all-equity with 100,000 shares. It now proposes to issue $150,000 of debt at an interest rate of 10% and use the proceeds to repurchase $15,000 shares at $10 per share. Profits before interest are expected to be $115,000.

a. what is the ratio of price to expected earning for River Cruises before it borrows the $150,000

correct answer: price-earnings ratio ------- 8.70

b. what is the ratio after is borrows?

correct answer: price-earnings ratio ------ ? (Please highlight answer)

2nd Part of question:

Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions):

Book-Value Balance Sheet
Net Working Capital	$45	Debt	$45
Long-Term Assets	55	Equity	55
	$100		$100

Market-Value Balance Sheet
Net Working Capital	$45	Debt	$45
Long-Term Assets	200	Equity	200
	$245		$245

Assume that MM's Theory holds except for taxes. There is no growth, and the $45 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 the United Frypan's after-tax WACC if rDebt = 7.1% and rEquity = 15.9%? (note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

c. Now supposed that congress passes a law that eliminated the deductibility of interest for tax purposes after a grace period of 5 years. What will be the new value of the firms, other things equal? Assume an 7.1% borrowing rate.note: (Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places.)

A. PV Tax Shield	$	million
B. WACC		%
C. New Value of the Firm	$	million