By how much could intel managers increase value of the firm

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Reference no: EM131327772

Intel Corp. is a firm that uses almost no debt and had a total market capitalization of about $179 billion in April 2004. Assume that Intel faces a 35 percent tax rate on corporate earnings. Ignore all elements of the decision, except the corporate tax savings.

a. By how much could Intel managers increase the value of the firm by issuing $50 billion in bonds (which would be rolled over in perpetuity) and simultaneously repurchasing $50 billion in stock? Why do you think that Intel has not taken advantage of this opportunity?

b. Suppose the personal tax rate on equity income, faced by Intel shareholders, is 10 percent, and the personal tax rate on interest income is 40 percent. Recalculate the gains to Intel from replacing $50 billion of equity with debt.

Reference no: EM131327772

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