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A CEO says, We already have enough cash to finance all of our new investments in projects. However, I want to generate interest tax shields.
A CEO says, We already have enough cash to finance all of our new investments in projects. However, I want to generate interest tax shields. Therefore, I have decided to borrow $10 million from a bank at an interest rate of 3% and invest it in government bonds, which also yield 3%. By doing so, we will reduce our tax bill next year by the amount of the tax shields that the interest on
$10 million of debt will generate. Does the CEOs strategy make sense? Please provide the rationale behind your answer.
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