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Market-Value Balance Sheet Net working capital Long-term assets 40 Debt 60 180 Equity 160 $ 220 220 Assume that MM's theory holds except for taxes. There is no growth, and the $60 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 rpebt =7.6% and rEquity= 15.4%? (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 7.6%. (Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places.)

Market-Value Balance Sheet Net working capital Long-term assets 40 Debt 60 180 Equity 160 $ 220 220 Assume that MM's theory holds except for taxes. There is no growth, and the $60 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 rpebt =7.6% and rEquity= 15.4%? (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 7.6%. (Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places.)

Essentials Of Investments
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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**Market-Value Balance Sheet:** - **Net working capital:** - Debt: $40 - Equity: $60 - **Long-term assets:** - Debt: $180 - Equity: $160 - **Total:** - Debt: $220 - Equity: $220 **Scenario:** Assume that MM’s theory holds except for taxes. There is no growth, and the $60 of debt is expected to be permanent. Assume a 21% corporate tax rate. **Questions:** 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 \( r_{Debt} = 7.6\% \) and \( r_{Equity} = 15.4\% \)? *(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 7.6%. *(Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places.)* **Responses (Note: these answers are marked with an "X" indicating they are not entirely correct):** a. PV tax shield: \( \$184.80 \) million b. WACC: \( 21.00\% \) c. New value of the firm: \( \$155.23 \) million
Transcribed Image Text:**Market-Value Balance Sheet:** - **Net working capital:** - Debt: $40 - Equity: $60 - **Long-term assets:** - Debt: $180 - Equity: $160 - **Total:** - Debt: $220 - Equity: $220 **Scenario:** Assume that MM’s theory holds except for taxes. There is no growth, and the $60 of debt is expected to be permanent. Assume a 21% corporate tax rate. **Questions:** 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 \( r_{Debt} = 7.6\% \) and \( r_{Equity} = 15.4\% \)? *(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 7.6%. *(Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places.)* **Responses (Note: these answers are marked with an "X" indicating they are not entirely correct):** a. PV tax shield: \( \$184.80 \) million b. WACC: \( 21.00\% \) c. New value of the firm: \( \$155.23 \) million
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