Question

1.      Here are book- and market-value balance sheets of the United Frypan Company: />                                    Book-Value Balance SheetNet working capital                      $50                    Debt       $70Long-term assets                          50                    Equity      30                                                    $100                                 $100
                              Market-Value Balance SheetNet working capital                        $50                Debt             $70Long-term assets                           200                Equity          180                                                      $250                                 $250
Assume that MM’s theory holds except for taxes. There is no growth, and the $70 of debt is expected to be permanent. Assume a 32% corporate tax rate. a. How much of the firm’s market value is accounted for by the debt-generated tax shield?
pv tax shield ——
b. What is United Frypan’s after-tax WACC if r_Debt = 7.4% and r_Equity = 15.6%? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
WACC —-%
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 7.4%.(Do not round intermediate calculations. Round your answer to 2 decimal places.)
New value of the firm ———

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