Market value is accounted for by debt-generated tax shield

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Reference no: EM131848141

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?

b. What is United Frypan’s after-tax WACC if rDebt = 6.7% and rEquity = 16.3%? (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. What will be the new value of the firm, other things equal? Assume a borrowing rate of 60.0%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Reference no: EM131848141

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