Question
Google Corporation has no debt on its balance sheet in 2008, but paid $1.6 billion in taxes. Assume that Google's marginal tax rate is 35%
Google Corporation has no debt on its balance sheet in 2008, but paid $1.6 billion in taxes. Assume that Google's marginal tax rate is 35% and Google's borrowing cost is 7%.
a) Assume that investors hold Google stock in retirement accounts that are free from personal taxes. If Google were to issue sufficient debt to reduce its taxes by $1 billion per year permanently, then what is the amount that Google needs to borrow and what value would be created
b) Assume that investors in Google pay a 15% tax rate on income from equity and a 35% tax rate on interest income. If Google were to issue sufficient debt to reduce its taxes by $1 billion per year permanently, then what would be the effective tax advantage and the value created by this debt?
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