Reference no: EM132794328
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.
problem 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.)
problem b. What is United Frypan's after-tax WACC if rDebt = 7.7% and rEquity = 15.3%? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
problem 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%. (Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places.)