Here are book- and market-value balance sheets of the United Frypan Company (figures in $...
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Accounting
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
$
45
Long-term assets
55
Equity
55
$
100
$
100
Market-Value Balance Sheet
Net working capital
$
45
Debt
$
45
Long-term assets
200
Equity
200
$
245
$
245
Assume that MMs theory holds except for taxes. There is no growth, and the $45 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? (Enter your answer in million rounded to 2 decimal places.)
b. What is United Frypans after-tax WACC if rDebt = 7.1% and rEquity = 15.9%? (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 after a grace period of 5 years. What will be the new value of the firm, other things equal? Assume a borrowing rate of 7.1%.(Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places.)
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