Facebook, Inc. has no debt. As Problem 21 in Chapter 15 makes clear, by issuing debt Facebook can generate a very large tax shield potentially worth nearly $2 billion. Given Facebook’s success, one would be hard pressed to argue that Facebook’s management are naïve and unaware of this huge potential to create value. A more likely explanation is that issuing debt would entail other costs. What might these costs be?

Problem 21(Ch 15)

Acme Storage has a market capitalization of $72 million and debt outstanding of $100 million. Acme plans to maintain this same debt-equity ratio in the future. Acme pays interest of 7.4% on its debt and has a corporate tax rate of 38%.