Your boss was impressed with your presentation regarding the irrelevance of capital structure, but, as expected, has realized that market imperfections like taxes must be accounted for.

You have now been asked to include taxes in your analysis. Your boss knows that interest is deductible and has decided that the stock price of Home Depot should increase if the firm increases its use of debt. Thus, your boss wants to propose a publicly announced share repurchase program (a tender offer) using the proceeds from a new debt issue and wants to present this plan to the CEO and perhaps to the Board of Directors.

Your boss would like you to examine the impact of two different scenarios, adding a relatively modest level of debt and adding a higher level of debt. In particular, your boss would like to consider issuing $5 billion in new debt or $10 billion in new debt. In either case, Home Depot would use the proceeds to repurchase stock.

For all future projections, use a corporate tax rate of 21%.

1. Begin by analyzing the scenario with $5 billion in new debt. Assuming the firm plans to keep this new debt outstanding forever, determine the present value of the tax shield of the new debt.

2. Determine the new stock price if the $5 billion in debt is used to repurchase stock.

a. Use the current market value of Home Depots equity that you calculated in Part 1.

b. Determine the new market value of the equity if the repurchase occurs.

c. Determine the new number of shares and the stock price after the repurchase is announced.

3. (4 points) What will Home Depots market value D/E ratio be?

\begin{tabular}{|c|c|} \hline Income Statements & in 1000 s dolars \\ \hline Period Ending: & 1/28/2018 \\ \hline Total Revenue & $100,904,000 \\ \hline Cost of Revenue & $66,548,000 \\ \hline Gross Profit & $34,356,000 \\ \hline \multicolumn{2}{|l|}{ Operating Expenses } \\ \hline Sales, General and Admin. & $17,864,000 \\ \hline Other Operating Items & $1,811,000 \\ \hline Operating Income & $14,681,000 \\ \hline Add'l income/expense items & $74,000 \\ \hline Earnings Before Interest and Tax & $14,755,000 \\ \hline Interest Expense & $1,057,000 \\ \hline Earnings Before Tax & $13,698,000 \\ \hline Income Tax & $5,088,000 \\ \hline Net Income-Cont. Operations & $8,630,000 \\ \hline Net Income & $8,630,000 \\ \hline Net Income Applicable to & $8,630,000 \\ \hline \multicolumn{2}{|l|}{ Common Shareholders } \\ \hline \multicolumn{2}{|l|}{ Balance Sheet } \\ \hline Period Ending: & 1/28/2018 \\ \hline \multicolumn{2}{|l|}{ Current Assets } \\ \hline Cash and Cash Equivalents & $3,595,000 \\ \hline Short Term Investments & $0 \\ \hline Net Receivables & $1,952,000 \\ \hline Inventory & $12,748,000 \\ \hline Other Current Assets & $638,000 \\ \hline Total Current Assets & $18,933,000 \\ \hline \multicolumn{2}{|l|}{ Long Term Assets } \\ \hline Long Term Investments & $0 \\ \hline Fixed Assets & $22,075,000 \\ \hline Goodwill & $2,275,000 \\ \hline Intangible Assets & $0 \\ \hline Other Assets & $1,246,000 \\ \hline Total Assets & $44,529,000 \\ \hline \multicolumn{2}{|l|}{ Current Liabilities } \\ \hline Accounts Payable & $11,628,000 \\ \hline Short Term Debt/Current Portiol & $2,761,000 \\ \hline Other Current Liabilities & $1,805,000 \\ \hline Total Current Liabilities & $16,194,000 \\ \hline Long Term Debt & $24,267,000 \\ \hline Other Liabilities & $2,174,000 \\ \hline Deferred Liability Charges & $440,000 \\ \hline Total Liabilities & $43,075,000 \\ \hline \multicolumn{2}{|l|}{ Stock Holders Equity } \\ \hline Common Stocks & $89,000 \\ \hline Capital Surplus & $10,192,000 \\ \hline Retained Earnings & $39,935,000 \\ \hline Treasury Stock & ($48,196,000) \\ \hline Other Equity & ($568,000) \\ \hline Total Equity & $1,454,000 \\ \hline \end{tabular}