Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions):  Book-Value Balance Sheet: Net working capital $35; Debt $55 Long-term assets  65 ; Equity 45 Total $100 $100   Market-Value Balance Sheet: Net working capital $35 Debt $55 Long-term assets 170 Equity 150 Total 205 205   Assume that MM's theory holds except for taxes

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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 $35; Debt $55

Long-term assets  65 ; Equity 45

Total $100 $100

 

Market-Value Balance Sheet: Net working capital $35 Debt $55

Long-term assets 170 Equity 150

Total 205 205

 

Assume that MM's theory holds except for taxes. There is no growth, and the $55 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? (Enter your answer in million rounded to 2 decimal places.)

b. What is United Frypan's after-tax WACC if r_Debt = 7.7% and r_Equity = 15.3%? (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 period of 5 years. What will be the new value of the firm, other things equal? Assume a borrowing rate of 7.7%. (Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places.)