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# 14-2. Here are book and market value balance sheets of the U

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14-2. Here are book and market value balance sheets of the United Frypan Company (UF):

Book Market

Net working capital \$ 20 \$ 40 Debt Net working capital \$ 20 \$ 40 Debt
Long- term assets 80 60 Equity Long- term assets 140 120 Equity
\$ 100 \$ 100 \$ 160 \$ 160

Assume that MM's theory holds with taxes. There is no growth, and the \$ 40 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?
b. How much better off will UF's shareholders be if the firm borrows \$20 more and uses it to repurchase stock?

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14-2. Here are book and market value balance sheets of the United Frypan Company (UF):

Book Market

Net working capital \$ 20 \$ 40 Debt Net working capital \$ 20 ...

#### Solution Summary

14-2. Here are book and market value balance sheets of the United Frypan Company (UF):

Book Market

Net working capital \$ 20 \$ 40 Debt Net working capital \$ 20 \$ 40 Debt
Long- term assets 80 60 Equity Long- term assets 140 120 Equity
\$ 100 \$ 100 \$ 160 \$ 160

Assume that MM's theory holds with taxes. There is no growth, and the \$ 40 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?
b. How much better off will UF's shareholders be if the firm borrows \$20 more and uses it to repurchase stock?

\$2.19
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Critically discuss this statement, concluding with whether or not you agree with it.

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Appraise the limitation of financial accounting as a system of reporting business performance
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Some description and explanation is needed but you need to develop arguments and discussion.
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Referred to: Information for Better Markets: Measurement in Financial Reporting (Institute of Chartered Accountants in England and Wales) icaew.com/bettermarkets

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