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Question I am stumped on:
Here are book- and market-value balance sheets of the United Frypan Company:
Book-Value Balance SheetNet working capital$40Debt$60Long-term assets 60Equity 40 $100 $100
Market-Value Balance SheetNet working capital$40Debt$60Long-term assets 180Equity 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 30% corporate tax rate.
a. How much of the firm’s market value is accounted for by the debt-generated tax shield?
b. What is United Frypan’s after-tax WACC if rDebt = 7.6% and rEquity = 15.4%?
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%
Thanks so much for your help:)
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