Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions): Book-Value Balance Sheet $40 Debt Equity Net working capital Long-term assets Market-Value Net working capital Long-term assets 60 $ 100 Balance $ 40 195 $ 235 Sheet Debt Equity $.30 70 $ 100 $ 30 205 $ 235 Assume that MM's theory holds except for taxes. There is no growth, and the $30 of debt is expected to be permanent. Assume a 21% corporate tax rate. a. How much of the firm's value is accounted for by the debt-generated tax shield? Note: Enter your answer in million rounded to 2 decimal places. b. What is United Frypan's after-tax WACC if pebt 7.0% and requity 16.00? Note: 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 an 7.0% borrowing rate. Note: Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places.
Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions): Book-Value Balance Sheet $40 Debt Equity Net working capital Long-term assets Market-Value Net working capital Long-term assets 60 $ 100 Balance $ 40 195 $ 235 Sheet Debt Equity $.30 70 $ 100 $ 30 205 $ 235 Assume that MM's theory holds except for taxes. There is no growth, and the $30 of debt is expected to be permanent. Assume a 21% corporate tax rate. a. How much of the firm's value is accounted for by the debt-generated tax shield? Note: Enter your answer in million rounded to 2 decimal places. b. What is United Frypan's after-tax WACC if pebt 7.0% and requity 16.00? Note: 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 an 7.0% borrowing rate. Note: Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Kk.331.
Transcribed Image Text:Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions):
Book-Value Balance Sheet
$ 40
60
$ 100
Net working capital
Long-term assets
Market-Value
Net working capital
Long-term assets
Debt
Equity
Balance Sheet
Debt
Equity
$ 40
195
$ 235
a. PV tax shield
b. WACC
c. New value of the firm
$ 30
70
$ 100
Assume that MM's theory holds except for taxes. There is no growth, and the $30 of debt is expected to be permanent. Assume a 21%
corporate tax rate.
$ 30
205
$ 235
a. How much of the firm's value is accounted for by the debt-generated tax shield?
Note: Enter your answer in million rounded to 2 decimal places.
b. What is United Frypan's after-tax WACC if pebt
Note: 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 an 7.0% borrowing rate.
Note: Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places.
million
%
million
7.0% and requity 16.08?
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