Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions): Book-Value Balance Sheet $ 55 45 $ 100 Net working capital Long-term assets Market-Value Net working capital Long-term assets Balance $ 55 210 $265 Debt Equity a. PV tax shield b. WACC c. New value of the firm Sheet Debt Equity $75 25 $100 Assume that MM's theory holds except for taxes. There is no growth, and the $75 of debt is expected to be permanent. Assume a 21% corporate tax rate. $75 190 $265 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 rDebt = 7.3% and rEquity = 15.7%? 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 7.3% borrowing rate. Note: Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places. million % million

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
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Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions):
Book-Value Balance Sheet
Debt
$ 55
45
Equity
$ 100
Net working capital
Long-term assets
Market-Value
Net working capital
Long-term assets.
Balance
$ 55
210
$ 265
Sheet
Debt
a. PV tax shield
b. WACC
c. New value of the firm
Equity
$75
25
$100
Assume that MM's theory holds except for taxes. There is no growth, and the $75 of debt is expected to be permanent. Assume a 21%
corporate tax rate.
$75
190
$265
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 rDebt = 7.3% and rEquity = 15.7%?
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 7.3% borrowing rate.
Note: Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places.
million
%
million
Transcribed Image Text:Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions): Book-Value Balance Sheet Debt $ 55 45 Equity $ 100 Net working capital Long-term assets Market-Value Net working capital Long-term assets. Balance $ 55 210 $ 265 Sheet Debt a. PV tax shield b. WACC c. New value of the firm Equity $75 25 $100 Assume that MM's theory holds except for taxes. There is no growth, and the $75 of debt is expected to be permanent. Assume a 21% corporate tax rate. $75 190 $265 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 rDebt = 7.3% and rEquity = 15.7%? 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 7.3% borrowing rate. Note: Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places. million % million
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