Facebook, Inc. had no debt on its balance sheet in2014, but paid $2 billion in taxes. Suppose Facebook were to issue sufficient debt to reduce its taxes by $250 million per year permanently. AssumeFacebook's marginal corporate tax rate is 34% and its borrowing cost is 5.7%.

a. IfFacebook's investors do not pay personal taxes(because they hold their Facebook stock intax-free retirementaccounts), how much value would be created(what is the value of the taxshield)?

b. How does your answer change if instead you assume thatFacebook's investors pay a 20% tax rate on income from equity and a 39.6% tax rate on interestincome?