Facebook, Inc. had no debt on its balance sheet in 2014, but paid $2 billion in taxes.

Question:

Facebook, Inc. had no debt on its balance sheet in 2014, but paid $2 billion in taxes. Suppose Facebook were to issue sufficient debt to reduce its taxes by $250 million per year permanently. Assume Facebook's marginal corporate tax rate is 35% and its borrowing cost is 5%.

a. If Facebook's investors do not pay personal taxes (because they hold their Facebook 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 Facebook's investors pay a 20% tax rate on income from equity and a 39.6% 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...