Question
In: Finance
Here are book and market value balance sheets of the United Frypan Company. Book value balance...
Here are book and market value balance sheets of the United Frypan Company.
Book value balance sheet
Net working capital 25 Debt 60
Long term assets 75 Equity 40
100 100
Market value balance sheet
Net working capital 25 debt 60
Long term assets 180 equity 145
205 205
Assume that MM's theory holds except for taxes. There is no growth, and the $60 of debt is expected to be permanent. Assume a 33% corporate tax rate.
a. How much of the firm's market value is accounted for by the debt generated tax shield? (PV Tax Shield)
b. What is United Frypan's after tax WACC if r debt= 6.7% and r equity = 16.3% (WACC %)
c. Now suppose that congress passes a law that eliminates the deductibility of interest for tax purposes. What will be the new value of the firm, other things equal? Assume a borrowing rate of 6.7%
Solutions
Expert Solution
|
Book value |
|||
|
Net working capital |
25 |
Debt |
60 |
|
Long term asset |
75 |
equity |
40 |
|
100 |
100 |
||
|
Market value |
|||
|
Net working capital |
25 |
Debt |
60 |
|
Long term asset |
180 |
equity |
145 |
|
205 |
205 |
1. Present value of tax shield=tax rate×debt
=33%×60
=19.8
2. WACC=Kd (1-t) ×D/V+Ke×E/v
=6.7(1-33%) ×60/205+16.3%×145/205
=4.489%×.29268+16.3%×.707317
=12.84312%
3. Tax shield on borrowing=33 %×( 6.7%×60)
=1.3266
Total value of debt=19.8-1.3266=18.4734
Total value of firm=205-18.4734=186.5266
jeff jeffy answered 2 years agoRelated Solutions
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Book-Value Balance Sheet
Net working capital
$
35
Debt
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Long-term assets
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Equity
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$
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$
100
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Debt
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Long-term assets
190
Equity
185
$
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$
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Here are book and market-value balance sheets of the United
Frypan Company:
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Debt
$
60
Long-term assets
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$
100
$
100
Market-Value Balance Sheet
Net working capital
$
70
Debt
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Long-term assets
150
Equity
160
$
220
$
220
Assume that MM’s theory holds except for taxes. There is no
growth, and the $60 of debt is expected to be permanent. Assume a
36% corporate tax rate....
Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions):...
Here are book- and market-value balance sheets of the United
Frypan Company (figures in $ millions):
Book-Value Balance Sheet
Net working
capital
$
35
Debt
$
40
Long-term
assets
65
Equity
60
$
100
$
100
Market-Value Balance Sheet
Net working
capital
$
35
Debt
$
40
Long-term
assets
190
Equity
185
$
225
$
225
Assume that MM’s theory holds except for taxes. There is no
growth, and the $40 of debt is expected to be permanent. Assume a...
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Here are book- and market-value balance sheets of the United
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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...
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December 31
Assets
2020
2019
Cash
$73,400
$33,100
Accounts receivable
85,800
71,200
Inventory
170,200
187,000
Land
72,800
101,000
Equipment
260,600
200,800
Accumulated depreciation—equipment
(66,100
)
(33,900
)
Total
$596,700
$559,200
Liabilities and Stockholders’ Equity
Accounts payable
$35,000
$47,500
Bonds payable
151,400
203,400
Common stock ($1 par)
217,600
174,100
Retained earnings
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134,200
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Additional information:
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Comparative Balance Sheets
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Assets
2017
2016
Cash
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Accounts receivable
86,400
71,300
Inventory
170,200
186,700
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72,800
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Equipment
260,000
200,000
Accumulated
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Total
$595,700
$559,100
Liabilities and Stockholders’ Equity
Accounts payable
$ 35,000
$ 47,200
Bonds payable
150,800
203,600
Common stock ($1 par)
215,200
173,000
Retained earnings
194,700
135,300
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$595,700
$559,100
Additional information:
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Exercise 13-8 Here are comparative balance sheets for Velo Company. VELO COMPANY Comparative Balance Sheets December...
Exercise 13-8
Here are comparative balance sheets for Velo Company.
VELO COMPANY
Comparative Balance Sheets
December 31
Assets
2017
2016
Cash
$ 73,000
$ 33,400
Accounts receivable
85,600
70,900
Inventory
170,000
186,900
Land
73,000
101,700
Equipment
260,700
200,800
Accumulated depreciation—equipment
(66,000
)
(33,700
)
Total
$596,300
$560,000
Liabilities and Stockholders’ Equity
Accounts payable
$ 35,300
$ 47,100
Bonds payable
149,000
203,200
Common stock ($1 par)
216,300
172,000
Retained earnings
195,700
137,700
Total
$596,300
$560,000
Additional information:
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$
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