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%.