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How much of the firm market value is accounted

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Reference no: EM132552202

Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions):

                        Book Value                Balance Sheet

Net working capital $30           Debt: $50

Long term assets $70                  Equity: $50

                         $100                   $100

Market Value                        Balance Sheet

Net working capital $30            Debt: $50

Long term assets $160               Equity: $140

$190                                        $190

Assume that MM's theory holds except for taxes. There is no growth, and the $50 of debt is expected to be permanent. Assume a 21% corporate tax rate.

Question 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.)

Question b. What is United Frypan's after-tax WACC if rDebt = 7.8% and rEquity = 15.2%? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Question 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 7.8%. (Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places.

Reference no: EM132552202

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