Taes and the Cost of Capital. Here are book- and market-value balance sheets of the United Fry pan Company (figures in $ millions): BOOK-VALUE BALANCE SHEET $ 20 Net working capital Long-term assets Debt $ 40 80 Equity 60 $100 $100 MARKET-VALUE BALANCE SHEET $ 20 $ 40 120 Net working capital Debt Long-term assets 140 Equity $160 $160 Assume that MM's theory holds except for taxes. There is no growth, and the $40 of debt is ex pected to be permanent. Assume a 35% 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 ra = 8% and reguiy = 15%? c. Now suppose that Congress passes a law that eliminates the deductibility of interest for tax purposes. What will be the new value of the firm, other things equal? Assume an 8% borrowing rate.

Taes and the Cost of Capital. Here are book- and market-value balance sheets of the United Fry pan Company (figures in $ millions): BOOK-VALUE BALANCE SHEET $ 20 Net working capital Long-term assets Debt $ 40 80 Equity 60 $100 $100 MARKET-VALUE BALANCE SHEET $ 20 $ 40 120 Net working capital Debt Long-term assets 140 Equity $160 $160 Assume that MM's theory holds except for taxes. There is no growth, and the $40 of debt is ex pected to be permanent. Assume a 35% 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 ra = 8% and reguiy = 15%? c. Now suppose that Congress passes a law that eliminates the deductibility of interest for tax purposes. What will be the new value of the firm, other things equal? Assume an 8% borrowing rate.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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