Apple Corporation had no debt on its balance sheet in 2011, but paid $8 billion in taxes.

Question:

Apple had no debt on its in 2011, but paid $8 billion in taxes. Suppose Apple were to issue sufficient debt to reduce its taxes by $1 billion per year permanently. Assume Apple’s marginal corporate tax rate is 35% and its borrowing cost is 4.5%.
a. If Apple’s investors do not pay personal taxes (because they hold their Apple stock in tax-free retirement accounts), how much value would be created (what is the value of the tax shield)?
b. How does your answer change if instead you assume that Apple’s investors pay a 15% tax rate on income from equity and a 35% tax rate on interest income?

Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial... Corporation
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