Here are United Frypan Company's book and market value balance sheets: Book value balance sheet Net working
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Question:
Here are United Frypan Company's book and market value balance sheets: |
Book value balance sheet | |||||
Net working capital | Ps | 20 | Debt | Ps | 40 |
Long-term assets | 80 | Equity | 60 | ||
Ps | 100 | Ps | 100 | ||
Market Value Balance | |||||
Net working capital | Ps | 20 | Debt | Ps | 40 |
Long-term assets | 140 | Equity | 120 | ||
Ps | 160 | Ps | 160 | ||
Suppose that MM's theory is valid except for taxes. There is no growth and the $40 in debt is expected to be permanent. Assume a corporate tax rate of 35%. |
1. | How much of the company's market value corresponds to the tax savings generated by the debt? |
Related Book For
Principles of Corporate Finance
ISBN: 978-0078034763
11th edition
Authors: Richard Brealey, Stewart Myers, Franklin Allen
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