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What is united frypan after-tax wacc

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Reference no: EM133010183

Question 1 - Dusit is financed 33% by debt yielding 8.3%. Investors require a return of 15.3% on Dusit's equity.

What is the company's weighted-average cost of capital if the corporate tax rate is 21%?

What would be the company's cost of capital if it were exempted from corporate tax?

Question 2 - Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions):

Book-Value Balance Sheet

Net working capital $45

Debt $65

Long-term assets 55

Equity 35 $100 $100

Market-Value Balance Sheet

Net working capital $45

Debt $65

Long-term assets 190

Equity 170 $235 $235

Assume that MM's theory holds except for taxes. There is no growth, and the $65 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 = 7.5% and rEquity = 15.5%?

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 7.5%.

Reference no: EM133010183

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