Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions): Book-Value Balance Sheet Net working сapital Long-term assets $ 45 Debt $ 45 55 Equity $ 100 55 6 100 Market-Value Balance Sheet Net working сapital Long-term assets $ 45 Debt $ 45 200 Equity $ 245 200 6 245 Assume that MM's 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 mlon rounded to 2 decimal places.) b. What is United Frypan's after-tax WACC if Bebe = 7.1% and 2quity=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 Intermedlate calculations. Enter your answer in milllon rounded to 2 decimal places.) a PV tax shield b. WACC million New value of the firm million C.
Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions): Book-Value Balance Sheet Net working сapital Long-term assets $ 45 Debt $ 45 55 Equity $ 100 55 6 100 Market-Value Balance Sheet Net working сapital Long-term assets $ 45 Debt $ 45 200 Equity $ 245 200 6 245 Assume that MM's 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 mlon rounded to 2 decimal places.) b. What is United Frypan's after-tax WACC if Bebe = 7.1% and 2quity=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 Intermedlate calculations. Enter your answer in milllon rounded to 2 decimal places.) a PV tax shield b. WACC million New value of the firm million C.
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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Transcribed Image Text:Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions):
Book-Value Balance Sheet
Net working
сapital
Long-term assets
$ 45 Debt
$ 45
55 Equity
$ 100
55
6 100
Market-Value Balance Sheet
Net working
сapital
Long-term assets
$ 45 Debt
$ 45
200 Equity
$ 245
200
6 245
Assume that MM's 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 mlon rounded to 2
decimal places.)
b. What is United Frypan's after-tax WACC if Bebe = 7.1% and 2quity=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 Intermedlate
calculations. Enter your answer in milllon rounded to 2 decimal places.)
a PV tax shield
b. WACC
million
New value of the firm
million
C.
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