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How much better off will ufs shareholders be

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Question

Here are book and market value balance sheets of the United Frypan Company (UF):

Book                                Value    Balance

SheetNet working capital     $30       $50

DebtLong-term assets         90         70

Equity                              $120     $120

                              Market Value     Balance Sheet

Net working capital         $30                $50

DebtLong-term assets     150                130

Equity                          $180              $180

Assume that MM's theory holds with taxes. There is no growth, and the $50 of debt is expected to be permanent. Assume a 40% corporate tax rate.

a. How much of the firm's value is accounted for by the debt-generated tax shield?

PV tax shield $

b. How much better off will UF's shareholders be if the firm borrows $30 more and uses it to repurchase stock?

Increase in equity value $

Reference no: EM132318411

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