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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.

a. How much of the firm's market value is accounted for by the debt-generated tax shield?


b. What is United Frypan’s after-tax WACC if rDebt = 6.1% and rEquity = 16.9%? (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 6.1%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

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SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

jeff jeffy answered 11 months ago
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