Question
In: Finance
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 21% corporate tax rate.
a. How much of the firm's market value is accounted for by the debt-generated tax shield? (Enter your answer in million rounded to 2 decimal places.)
b. What is United Frypan’s after-tax WACC if rDebt = 6.9% and rEquity = 16.1%? (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 a borrowing rate of 6.9%. (Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places.)
| 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 21% corporate tax rate.
a. How much of the firm's market value is accounted for by the debt-generated tax shield? (Enter your answer in million rounded to 2 decimal places.)
b. What is United Frypan’s after-tax WACC if rDebt = 6.9% and rEquity = 16.1%? (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 a borrowing rate of 6.9%. (Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places.)
Solutions
jeff jeffy answered 2 years agoRelated Solutions
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 $ 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...
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...
Here are book- and market-value balance sheets of the United Frypan Company: Book-Value Balance Sheet Net...
Here are book- and market-value balance sheets of the United
Frypan Company:
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
37% corporate tax rate....
Here are book and market-value balance sheets of the United Frypan Company: Book-Value Balance Sheet Net...
Here are book and market-value balance sheets of the United
Frypan Company:
Book-Value Balance Sheet
Net working capital
$
70
Debt
$
60
Long-term assets
30
Equity
40
$
100
$
100
Market-Value Balance Sheet
Net working capital
$
70
Debt
$
60
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....
Arlington Corporation's financial statements (dollars and shares are in millions) are provided here. Balance Sheets as...
Arlington Corporation's financial statements (dollars and shares
are in millions) are provided here.
Balance Sheets as of December
31
2019
2018
Assets
Cash and equivalents
$ 15,000
$ 11,000
Accounts receivable
25,000
20,000
Inventories
22,945
19,000
Total current assets
$ 62,945
$ 50,000
Net plant and equipment
50,000
47,000
Total assets
$112,945
$97,000
Liabilities and Equity
Accounts payable
$ 10,600
$ 8,500
Accruals
7,900
6,000
Notes payable
6,200
5,450
Total current liabilities
$ 24,700
$ 19,950
Long-term bonds
15,000
15,000
Total liabilities
$...
Arlington Corporation's financial statements (dollars and shares are in millions) are provided here. Balance Sheets as...
Arlington Corporation's financial statements (dollars and shares
are in millions) are provided here.
Balance Sheets as of December
31
2019
2018
Assets
Cash and equivalents
$ 13,000
$ 11,000
Accounts receivable
35,000
30,000
Inventories
30,625
28,000
Total current assets
$ 78,625
$ 69,000
Net plant and equipment
51,000
46,000
Total assets
$129,625
$115,000
Liabilities and Equity
Accounts payable
$ 10,700
$ 8,000
Accruals
7,500
5,000
Notes payable
6,200
5,150
Total current liabilities
$ 24,400
$ 18,150
Long-term bonds
10,000
10,000
Total liabilities
$...
Arlington Corporation's financial statements (dollars and shares are in millions) are provided here. Balance Sheets as...
Arlington Corporation's financial statements (dollars and shares
are in millions) are provided here.
Balance Sheets as of December
31
2019
2018
Assets
Cash and equivalents
$ 13,000
$ 11,000
Accounts receivable
25,000
20,000
Inventories
24,685
17,000
Total current assets
$ 62,685
$ 48,000
Net plant and equipment
49,000
47,000
Total assets
$111,685
$95,000
Liabilities and Equity
Accounts payable
$ 10,500
$ 9,500
Accruals
7,600
5,000
Notes payable
6,900
5,450
Total current liabilities
$ 25,000
$ 19,950
Long-term bonds
15,000
15,000
Total liabilities
$...
Arlington Corporation's financial statements (dollars and shares are in millions) are provided here. Balance Sheets as...
Arlington Corporation's financial statements (dollars and shares
are in millions) are provided here.
Balance Sheets as of December
31
2018
2017
Assets
Cash and equivalents
$ 13,000
$ 12,000
Accounts receivable
30,000
25,000
Inventories
27,115
24,000
Total current assets
$ 70,115
$ 61,000
Net plant and equipment
52,000
48,000
Total assets
$122,115
$109,000
Liabilities and Equity
Accounts payable
$ 10,400
$ 9,000
Accruals
8,000
7,000
Notes payable
6,900
5,450
Total current liabilities
$ 25,300
$ 21,450
Long-term bonds
10,000
10,000
Total liabilities
$...
Arlington Corporation's financial statements (dollars and shares are in millions) are provided here. Balance Sheets as...
Arlington Corporation's financial statements (dollars and shares
are in millions) are provided here.
Balance Sheets as of December
31
2019
2018
Assets
Cash and equivalents
$ 13,000
$ 11,000
Accounts receivable
35,000
25,000
Inventories
33,205
24,000
Total current assets
$ 81,205
$ 60,000
Net plant and equipment
54,000
49,000
Total assets
$135,205
$109,000
Liabilities and Equity
Accounts payable
$ 10,100
$ 8,000
Accruals
7,200
7,000
Notes payable
6,600
5,250
Total current liabilities
$ 23,900
$ 20,250
Long-term bonds
15,000
15,000
Total liabilities
$...
Arlington Corporation's financial statements (dollars and shares are in millions) are provided here. Balance Sheets as...
Arlington Corporation's financial statements (dollars and shares
are in millions) are provided here.
Balance Sheets as of December
31
2019
2018
Assets
Cash and equivalents
$ 13,000
$ 12,000
Accounts receivable
30,000
20,000
Inventories
28,650
18,000
Total current assets
$ 71,650
$ 50,000
Net plant and equipment
49,000
45,000
Total assets
$120,650
$95,000
Liabilities and Equity
Accounts payable
$ 10,700
$ 8,500
Accruals
7,700
7,000
Notes payable
6,700
5,050
Total current liabilities
$ 25,100
$ 20,550
Long-term bonds
20,000
20,000
Total liabilities
$...
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