Use the borrowed funds to repurchase outstanding shares

Reference no: EM13303729

KD Industries has 30 million shares outstanding with a market price of $20 per share and no debt. KD has had consistently stable earnings, and pays a 35% tax rate. Management plans to borrow $200 million on a permanent basis through a leveraged recapitalization in which they would use the borrowed funds to repurchase outstanding shares.

Assuming that the interest income tax is 35% and the average tax on equity income is 15%, calculate the present value of the interest tax shield provided by KD's recapitalization.

Reference no: EM13303729

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