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Here are book-and-market – value balance sheets of the United Frypan Company (UF): Book: Net Working Capital $20 $40Debt Long-Term assets 80 60Equity $100 $100 Market: Net Working Capital $20 $40 Debt Long-Term assets 140 120 Equity $160 $160 Assume that MM's theory holds with taxes. There is no growth, and the $40 of debt is expected to be permanent. Assume a 40% corporate tax rate. A. How much of the firm's value is accounted for by the debt-generated tax shield? B. How much better off will UF's shareholders be if the firm borrows $20 more ans uses it to repurchase stock?

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Financial Management, Finance

Category:- Financial Management
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