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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 in Google pay a 15% tax rate on income from equity and a 35% tax rate on interest income.If Google were to issue sufficient debt to reduce its corporate taxes by $1 billion per year permanently,then the value that would be created is closest to:

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The value created would be $1 billion / (7% - 3.5%) = $14.3 billion. However, investors would pay taxes on the interest income, reducing the value created to $14.3 billion * (1 - 35%) = $9.3 billion. Since Google's marginal tax rate is 35%, the value created to Google is $9.3 billion * (1 + 35%) = $12.5 billion.

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