21. Taxes and the Cost of Capital. Here are book- and market value balance sheets...
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21. Taxes and the Cost of Capital. Here are book- and market value balance sheets of the United Frypan Company (figures in $ millions): BOOK-VALUE BALANCE SHEET Net working capital $ 20 Debt Long-term assets 80 Equity $100 $ 40 60 $100 MARKET-VALUE BALANCE SHEET Net working capital $ 20 Debt Long-term assets 140 Equity $160 $ 40 120 $160 Assume that MM's theory holds except for taxes. There is no growth, and the $40 of debt is expected to be permanent. Assume a 35% corporate tax rate. (L016-2) a. How much of the firm's value is accounted for by the debt-generated tax shield? b. What is United Frypan's after-tax WACC if rdebe = 8% and requity = 15%? 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 an 8% borrowing rate
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