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How much of the firm market value is accounted

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Question - 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 $55

Long-term assets 65 ; Equity 45

Total $100 $100

Market-Value Balance Sheet: Net working capital $35 Debt $55

Long-term assets 170 Equity 150

Total 205 205

Assume that MM's theory holds except for taxes. There is no growth, and the $55 of debt is expected to be permanent. Assume a 21% corporate tax rate.

Required -

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 = 7.7% and rEquity = 15.3%?

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 7.7%.

Reference no: EM132776531

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