21. Taxes and the Cost of Capital. Here are book- and market-value balance sheets of the UnitedFrypan Company (figures in $ millions):BOOK-VALUE BALANCE SHEETNet working capital$ 20Debt$ 40Long-term assets80Equity60$100$100MARKET-VALUE BALANCE SHEETNet working capital$ 20Debt$ 40Long-term assets140Equity120$160$160 Assume that MM's theory holds except for taxes. There is no growth, and the $40 of debt isexpected to be permanent. Assume a 21% corporate tax rate. (LO16-2)a. How much of the firm's value is accounted for by the debt-generated tax shield?b. What is United Frypan's after-tax WACC if rdebt = 8% and requityc. Now suppose that Congress passes a law that eliminates the deductibility of interest for tax pur-poses. What will be the new value of the firm, other things equal? Assume an 8% borrowing rate.= 15%?

Firm's value is defined as the sum of claims of their shareholders as well as creditors. One of the…

21. Taxes and the Cost of Capital. Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions): BOOK-VALUE BALANCE SHEET Net working capital $ 20 Debt $ 40 Long-term assets 80 Equity 60 $100 $100 MARKET-VALUE BALANCE SHEET Net working capital $ 20 Debt $ 40 Long-term assets 140 Equity 120 $160 $160

21. Taxes and the Cost of Capital. Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions): BOOK-VALUE BALANCE SHEET Net working capital $ 20 Debt $ 40 Long-term assets 80 Equity 60 $100 $100 MARKET-VALUE BALANCE SHEET Net working capital $ 20 Debt $ 40 Long-term assets 140 Equity 120 $160 $160

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter12: Balanced Scorecard And Other Performance Measures

Section: Chapter Questions

Problem 7EB: Assume Plainfield Manufacturing has debt of $6,500,000 with a cost of capital of 9.5% and equity of...

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