Reference no: EM132811946
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 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 = 7.1% and rEquity = 15.9%? (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 7.1%. (Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places.)
a. PV tax shield __________ million
b. WACC __________ %
c New Value of the firm ________ million