Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions): Book-Value Balance Sheet $ 30 Debt 70 Equity $ 100 Net working capital Long-term assets Market-Value Net working capital Long-term assets Balance $ 30 185 $ 215 Sheet Debt Equity $ 50 50 $ 100 $ 50 165 $ 215 Assume that MM's theory holds except for taxes. There is no growth, and the $50 of debt is expected to be permanent. Assume. corporate tax rate. 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 Debt 6.8% and rEquity 16.2%? 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 years. What will be the new value of the firm, other things equal? Assume an 6.8 % borrowing rate. Note: Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places.

Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions): Book-Value Balance Sheet $ 30 Debt 70 Equity $ 100 Net working capital Long-term assets Market-Value Net working capital Long-term assets Balance $ 30 185 $ 215 Sheet Debt Equity $ 50 50 $ 100 $ 50 165 $ 215 Assume that MM's theory holds except for taxes. There is no growth, and the $50 of debt is expected to be permanent. Assume. corporate tax rate. 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 Debt 6.8% and rEquity 16.2%? 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 years. What will be the new value of the firm, other things equal? Assume an 6.8 % borrowing rate. Note: Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter20: Financing With Derivatives

Section: Chapter Questions

Problem 7P

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