Book- and market-value balance sheets

Assignment Help Corporate Finance

Reference no: EM13201800

Here are book- and market-value balance sheets of the United Frypan Company (UF):

Book Market

Net Working Capital $20 $40 Debt Net Working Capital $20 $40 Debt

Long-term asset $80 $60 Equity Long-term Assets $140 $120 Equity

$100 $100 $160 $160

(The middle-of-the-road party was founded in 1961 by Miller and Modigliani, always referred to as "MM", when they published a proof that dividend policy is irrelevant in a world without taxes, transaction costs, or other market imperfections. MM argued as follows. Suppose your firm has settled on its investment program. You have a plan to finance the investments with cash on hand, additional borrowing, and reinvestment of future earnings. Any surplus cash is to be paid out as dividends.) Assume that MM's theory holds with taxes. There is no growth, and the $40 of debt is expected to be permanent. Assume a 40% corporate tax rate.

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

b. How much better off will UFs shareholders be if the firm borrows $20 more and uses it to repurchase stock?

Reference no: EM13201800

Questions Cloud

What rent should the manager charge to maximize revenue : Similarly, one additional unit will be occupied for each 9 dollar decrease in rent. What rent should the manager charge to maximize revenue.

Increase the target person’s perception : Which tactic is most likely to increase the target person’s perception that a request or proposal is important for the team or organization

How budget constraint in a two-period model is affected : Describe how the budget constraint of a household in a two-period model is affected by each of the following changes. In Each Case, do you think the household is better off, or worse off, or is it ambiguous If ambiguous.

How does the relative tax advantage change : How does the relative tax advantage change if the company decides to pay out all equity income as cash dividends that are taxed at 15%?

Book- and market-value balance sheets : How much of the firm's value is accounted for by the debt-generated tax shield and how much better off will UF's shareholders be if the firm borrows $20 more and uses it to repurchase stock?

Humility action plan : One of the most important discussions in this chapter is practicing self-forgetfulness. Many cultures place a high value on achievement, appearance, and a strong self. In such a culture, it is important to cultivate humility.

How would such a tax affect the relative wage rate : Assume that capital and labor both exhibit diminishing marginal returns, so that capital can be substituted for labor in the production process (and vice versa), but capital and labor are not perfect substitutes. How would such a tax affect the rel..

Find the amount invested at each rate : Two investments are made totaling $8800. For a certain year these investments yielded $1326 in simple interest. Part of the $8800 was invested at 14% the part at 16%. Find the amount invested at each rate.

Greatest predictors of poverty : Identify and discuss the three greatest predictors of poverty in America. In your opinion, what can be done to help the impoverished find their way out of poverty? Explain your answer.

User Account

All Pages