(b) Iron Corporation currently has no debt on its balance sheet. Iron's marginal tax rate is 30% and the cost of debt is 7%. (1) If Iron were to issue sufficient debt to reduce its taxes by $100 million per year permanently, how much debt would Iron need to issue? What would be the value of the tax shield? (ii) Iron plans to borrow $5 billion on a permanent basis through a leveraged recapitalization in which they would use the borrowed funds to repurchase outstanding shares. Investors pay a tax rate of 35% on their interest income and 15% on their income from capital gains and dividends. Calculate the present value of the interest tax shield from this recapitalization from an investor's perspective.

(b) Iron Corporation currently has no debt on its balance sheet. Iron's marginal tax rate is 30% and the cost of debt is 7%. (1) If Iron were to issue sufficient debt to reduce its taxes by $100 million per year permanently, how much debt would Iron need to issue? What would be the value of the tax shield? (ii) Iron plans to borrow $5 billion on a permanent basis through a leveraged recapitalization in which they would use the borrowed funds to repurchase outstanding shares. Investors pay a tax rate of 35% on their interest income and 15% on their income from capital gains and dividends. Calculate the present value of the interest tax shield from this recapitalization from an investor's perspective.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter17: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 3P

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