Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions): Book-Value Balance Sheet Net working capital $ 50 Debt $ 70 Long-term assets 50 Equity 30 $ 100 $ 100 Market-Value Balance Sheet Net working capital $ 50 Debt $ 70 Long-term assets 160 Equity 140 $ 210 $ 210 Assume that MM’s theory holds except for taxes. There is no growth, and the $70 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 Frypan’s after-tax WACC if rDebt = 6.3% and rEquity = 16.7%? (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 6.3%. (Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places.) a. PV Tax Shield = million b. WACC= % c. Naw Value of the Firm= million
Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions):
| Book-Value |
|||||
| Net working capital | $ | 50 | Debt | $ | 70 |
| Long-term assets | 50 | Equity | 30 | ||
| $ | 100 | $ | 100 | ||
| Market-Value Balance Sheet | |||||
| Net working capital | $ | 50 | Debt | $ | 70 |
| Long-term assets | 160 | Equity | 140 | ||
| $ | 210 | $ | 210 | ||
Assume that MM’s theory holds except for taxes. There is no growth, and the $70 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 Frypan’s after-tax WACC if rDebt = 6.3% and rEquity = 16.7%? (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 6.3%. (Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places.)
a. PV Tax Shield = million
b. WACC= %
c. Naw Value of the Firm= million
Given Information:
| Book-Value Balance Sheet | |||||
| Net working capital | $ | 50 | Debt | $ | 70 |
| Long-term assets | 50 | Equity | 30 | ||
| $ | 100 | $ | 100 |
| Market-Value Balance Sheet | |||||
| Net working capital | $ | 50 | Debt | $ | 70 |
| Long-term assets | 160 | Equity | 140 | ||
| $ | 210 | $ | 210 | ||
Tax rate= 21 %.
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