Problem 16-21 Taxes and the Cost of Capital (LO2) Here are book- and market-value balance sheets...

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Problem 16-21 Taxes and the Cost of Capital (LO2) Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions): Book-Value Balance Sheet Net working capital Long-term assets $ 20 Debt $ 70 80 Equity 30 $ 100 $ 100 Market-Value Balance Sheet Net working capital Long-term assets $ 20 175 $ 195 Debt Equity $ 70 125 $195 Assume that MM's theory holds except for taxes. There is no growth, and the $70 of debt is expected to be permanent. As corporate tax rate. a. How much of the firm's value is accounted for by the debt-generated tax shield? Note: Enter your answer in million rounded to 2 decimal places. b. What is United Frypan's after-tax WACC if "Debt 6.6% and Equity 16.4% ? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. c. Now suppose that Congress passes a law that eliminates the deductibility of interest for tax purposes after a grace p years. What will be the new value of the firm, other things equal? Assume an 6.6% borrowing rate. Note: Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places. Prov 4 of 1 Navt Problem 16-21 Taxes and the Cost of Capital (LO2) Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions): Book-Value Balance Sheet Net working capital Long-term assets $ 20 Debt $ 70 80 Equity 30 $ 100 $ 100 Market-Value Balance Sheet Net working capital Long-term assets $ 20 175 $ 195 Debt Equity $ 70 125 $195 Assume that MM's theory holds except for taxes. There is no growth, and the $70 of debt is expected to be permanent. As corporate tax rate. a. How much of the firm's value is accounted for by the debt-generated tax shield? Note: Enter your answer in million rounded to 2 decimal places. b. What is United Frypan's after-tax WACC if "Debt 6.6% and Equity 16.4% ? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. c. Now suppose that Congress passes a law that eliminates the deductibility of interest for tax purposes after a grace p years. What will be the new value of the firm, other things equal? Assume an 6.6% borrowing rate. Note: Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places. Prov 4 of 1 Navt