Use the following information to answer the question(s)below.
Google Corporation has no debt on its balance sheet in 2008,but paid $1.6 billion in taxes.Assume that Google's marginal tax rate is 35% and Google's borrowing cost is 7%.
-Assume that investors hold Google stock in retirement accounts that are free from personal taxes.If Google were to issue sufficient debt to reduce its taxes by $1 billion per year permanently,then the value that would be created is closest to:

Question

Quizplus · Accepted Answer

The value created by the tax shield is calculated as the present value of the perpetual tax savings. The formula is: Tax Shield Value = Tax Savings / Borrowing Cost. Here, Tax Savings = $1 billion, Borrowing Cost = 7%. Therefore, Tax Shield Value = $1 billion / 0.07 = $14.29 billion, which is closest to $14.25 billion.

Use the Following Information to Answer the Question(s)below