Question

Here are book- and market-value balance sheets of the United Frypan Company: 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 31% corporate tax rate.

a. How much of the firm's market value is accounted for by the debt-generated tax shield? (Round your answer to 2 decimal places.) PV tax shield $

b. What is United Frypan’s after-tax WACC if rDebt = 7.5% and rEquity = 15.5%? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) WACC % 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 discount rate of 7.5%. (Do not round intermediate calculations. Round your answer to 2 decimal places.) New value of the firm $ References