Question
23. Alphabet Inc. has no debt on its balance sheet in 2008, but paid $1.6 billion in taxes. Assume that Alphabet's marginal tax rate is
23. Alphabet Inc. has no debt on its balance sheet in 2008, but paid $1.6 billion in taxes. Assume that Alphabet's marginal tax rate is 21% and Alphabet's borrowing cost is 7%. Assume that investors in Alphabet pay a 15% tax rate on income from equity and a 25% tax rate on interest income. If Alphabet were to issue sufficient debt to reduce its corporate taxes by $.5 billion per year permanently, then the value that would be created is closest to $______ billion.
a. 14.3
b. 3.6
c. 12.2
d. 6.1
Use data from Q23 above, assume that investors in Alphabet Inc pay a 15% tax rate on income from equity and a 25% tax rate on interest income. If Alphabet were to issue sufficient debt to reduce its taxes by $500 million per year permanently, then the effective tax advantage of this debt would be closest to _____%
a.10
b.15
c. 30
d.25
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