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Intel has an EBIT of 3 4 billion and faces a

Intel has an EBIT of $3.4 billion and faces a marginal tax rate of 36.50%. It currently has $1.5 billion in debt outstanding, and a market value of equity of $51 billion. The beta for the stock is 1.35, and the pretax cost of debt is 6.80%. The Treasury bond rate is 6%. Assume that the firm is considering a massive increase in leverage to a 70% debt ratio, at which level the bond rating will be C (with a pretax interest rate of 16%).

a. Estimate the current cost of capital.

b. Assuming that all debt gets refinanced at the new market interest rate, what would your interest expenses be at 70% debt? Would you be able to get the entire tax benefit? Why or why not?

c. Estimate the beta of the stock at 70% debt, using the conventional levered beta calculation. Re-estimate the beta, on the assumption that Crated debt has a beta of 0.60. Which one would you use in your cost of capital calculation?

d. Estimate the cost of capital at 70% debt.

e. What will happen to firm value if Intel moves to a 70% debt ratio? (with no growth)

f. What general lessons on capital structure would you draw for other growth firms?

a. Estimate the current cost of capital.

b. Assuming that all debt gets refinanced at the new market interest rate, what would your interest expenses be at 70% debt? Would you be able to get the entire tax benefit? Why or why not?

c. Estimate the beta of the stock at 70% debt, using the conventional levered beta calculation. Re-estimate the beta, on the assumption that Crated debt has a beta of 0.60. Which one would you use in your cost of capital calculation?

d. Estimate the cost of capital at 70% debt.

e. What will happen to firm value if Intel moves to a 70% debt ratio? (with no growth)

f. What general lessons on capital structure would you draw for other growth firms?

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