Apple Corporation had no debt on its balance sheet in 2008, but paid $2 billion in taxes. Suppose Apple were to issue sufficient debt to reduce its taxes by $1 billion per year permanently. Assume Apples marginal corporate tax rate is 35% and its borrowing cost is 7.5%.

a. If Apples investors do not pay personal taxes (because they hold their Apple stock in taxfree

retirement accounts), how much value would be created (what is the value of the tax

shield)?

b. How does your answer change if instead you assume that Apples investors pay a 15% tax

rate on income from equity and a 35% tax rate on interest income?