What is united frypan after-tax wacc

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1) The following are book and market value balance sheets of the United Frypan Company (figures in $ millions):

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 21% 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%?

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 6.7%

Reference no: EM132910765

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