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Market value is accounted for by debt generated tax shied

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Reference no: EM131986706

Here are book and market value balance sheets of the United Frypan Company.

Book value balance sheet   

Net working capital 25 Debt 60

Long term assets    75    Equity 40

100    100

Market value balance sheet   

Net working capital    25    debt    60

Long term assets    180 equity    145

205    205

Assume that MM's theory holds except for taxes. There is no growth, and the $60 of debt is expected to be permanent. Assume a 33% corporate tax rate.

a. How much of the firm's market value is accounted for by the debt generated tax shield? (PV Tax Shield)

b. What is United Frypan's after tax WACC if r debt= 6.7% and r equity = 16.3%    (WACC %)

c. Now suppose that congress passes a law that eliminates the deductibility of interest for tax purposes. What will be the new value of the firm, other things equal? Assume a borrowing rate of 6.7%

Reference no: EM131986706

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