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Value of the Tax​ Shield Assignment | Homework For You

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May 27th, 2020

Facebook, Inc. had no debt on its balance sheet in​ 2014, but paid ​$2 billion in taxes. Suppose Facebook were to issue sufficient debt to reduce its taxes by ​$270 million per year permanently. Assume​ Facebook’s marginal corporate tax rate is 37 % and its borrowing cost is 4.5 %.Homework For You

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a. If​ Facebook’s investors do not pay personal taxes​ (because they hold their Facebook stock in​ tax-free 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​ Facebook’s investors pay a 20 % tax rate on income from equity and a 39.6 % tax rate on interest​ income? Get Finance homework help today

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