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 $600 million per year permanently,then the amount that Google needs to borrow is closest to:

Question

Quizplus · Accepted Answer

To calculate the amount of debt Google needs to issue, first we need to find out how much pre-tax income Google needs to shield from taxes to save $600 million in taxes permanently. Since Google's marginal tax rate is 35%, we can set up an equation:

$600 million / (1 - 35%) = $923 million

This means that Google needs to shield $923 million of pre-tax income from taxes to save $600 million permanently. Now, we can calculate the amount of debt Google needs to issue:

Debt = $923 million / 7%
Debt = $13.18 billion

However, this amount only shields $923 million of pre-tax income from taxes, which is not enough. Google needs to shield more pre-tax income to save $600 million permanently. Let's calculate how much pre-tax income Google needs to shield altogether:

$600 million / 35% = $1.71 billion

Now we can calculate the amount of debt that Google needs to issue to shield $1.71 billion of pre-tax income from taxes:

Debt = $1.71 billion / 7%
Debt = $24.43 billion

Therefore, the closest answer choice is C) $24.50 billion.

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