Question: Book-Value Balance Sheet Net working capital $ 40 Debt $ 75 Long-term assets 60 Equity 25 $ 100 $ 100 Market-Value Balance Sheet Net working

Book-Value Balance Sheet
Net working capital	$	40	Debt	$	75
Long-term assets		60	Equity		25
	$	100		$	100

Market-Value Balance Sheet
Net working capital	$	40	Debt	$	75
Long-term assets		165	Equity		130
	$	205		$	205

Assume that MMs theory holds except for taxes. There is no growth, and the $75 of debt is expected to be permanent. Assume a 21% 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 Frypans after-tax WACC if r_Debt = 6.4% and r_Equity = 16.6%?

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 6.4%.

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