Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions):...

 

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Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions): 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 21% corporate tax rate. a. How much of the firm's value is accounted for by the debt- generated tax shield? Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions): 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 21% corporate tax rate. a. How much of the firm's value is accounted for by the debt- generated tax shield?

Answer rating: 100% (QA)

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