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Market-value balance sheets of the united frypan company

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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 $ 80

Long-term assets 70 Equity 20

$ 100 $ 100

Market-Value Balance Sheet

Net working capital $ 30 Debt $ 80

Long-term assets 170 Equity 120

$ 200 $ 200

Assume that MM's theory holds except for taxes. There is no growth, and the $80 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 = 6.5% and rEquity = 16.5%? (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 6.5%. (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

Reference no: EM132499651

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