Net working capital $ 20 $ 40 Debt Net working capital $ 20 $ 40 Debt
Long- term assets 80 60 Equity Long- term assets 140 120 Equity
$ 100 $ 100 $ 160 $ 160
Suppose that MM's theory holds with taxes. There is no growth, and $ 40 of debt is expected to be permanent. Suppose 40% corporate tax rate.
a. Compute how much of firm's value is accounted for by debt-generated tax shield?
b. find out how much better off will UF's shareholders be if firm borrows $20 more and uses it to again buy stock?