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Here are book- and market-value balance sheets of the United Frypan Company: Book-Value Balance Sheet Net...

Here are book- and market-value balance sheets of the United Frypan Company: Book-Value Balance Sheet Net working capital $ 50 Long-term assets 50 Total:100 Equity $30 Debt $70 Total:100 Market-Value Balance Sheet Net working capital $ 50 Long-term assets 200 Total:250 Equity $180 Debt $70 Total: 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? b. What is United Frypan’s after-tax WACC if rDebt = 7.4% and rEquity = 15.6%? 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%.

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