Here are book- and market-value balance sheets of the United Frypan Company: Book-Value Balance Sheet Net working capital $ 45 Debt $ 45 Long-term assets 55 Equity 55 $ 100 $ 100 Market-Value Balance Sheet Net working capital $ 45 Debt $ 45 Long-term assets 200 Equity 200 $ 245 $ 245
Assume that MM’s theory holds except for taxes. There is no growth, and the $45 of debt is expected to be permanent. Assume a 35% 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 = 7.1% and rEquity = 15.9%? (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. What will be the new value of the firm, other things equal? Assume a borrowing rate of 7.1%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)