Question
In: Finance
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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jeff jeffy answered 1 year agoRelated Solutions
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...
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 (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...
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...
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investors and management.
The market value balance sheet for Bobaflex Manufacturing is shown here. The company has declared a...
The market value balance sheet for Bobaflex Manufacturing is
shown here. The company has declared a 25 percent stock dividend.
The stock goes ex dividend tomorrow (the chronology for a stock
dividend is similar to that for a cash dividend).
Market Value Balance Sheet
Cash
$
99,000
Debt
$
158,000
Fixed assets
830,000
Equity
771,000
Total
$
929,000
Total
$
929,000
a.
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Equity
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50,000,000 Long-term debt 20,000,000 Common stock (1 million
shares) 1,000,000 Retained earnings 39,000,000 Total assets
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Market Value Capital Structure Suppose the Schoof Company has this book value balance sheet: Current assets...
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Suppose the Schoof Company has this book value balance
sheet:
Current assets
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Current liabilities
$20,000,000
Fixed assets
70,000,000
Notes payable
$10,000,000
Long-term debt
30,000,000
Common stock (1 million
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Retained earnings
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Total assets
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Total liabilities and equity
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The notes payable are to banks, and the interest rate on this
debt is 8%, the same as the rate on new bank loans. These bank
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