Question: Intel Corp. is a firm that uses almost no debt and had a total market capitalization of about $179 billion in April 2004. Assume that

Intel Corp. is a firm that uses almost no debt and had a total market capitalization of about $179 billion in April 2004. Assume that Intel faces a 35 percent tax rate on corporate earnings. Ignore all elements of the decision except corporate tax savings.

a. By how much could Intel managers increase the value of the firm by issuing $50 billion in bonds (which would be rolled over in perpetuity) and simultaneously repurchasing $50 billion in stock? Why do you think that Intel has not taken advantage of this opportunity?

b. Suppose that the personal tax rate on equity income faced by Intel shareholders is 10 percent, and the personal tax rate on interest income is 40 percent. Recalculate the gains to Intel from replacing $50 billion of equity with debt.

Step by Step Solution

★★★★★

3.41 Rating (176 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

a If Intel issued 50 billion in debt and used the pr... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

428-B-C-F-C-S (856).docx

120 KBs Word File

Students Have Also Explored These Related Corporate Finance Questions!

Why do you think variable costing has also been called direct costing?

Why do you think the increase in house prices during the 2000 to 2007 period is referred to as a bubble?

Why do you think managers underutilize project selection models?

Individual Case Analysis Four cases are available from Harvard (see first : Case pack of 4 cases available at: http://cb.hbsp.harvard.edu/cbmp/access/49960103 ). Answer each of these questions in...

An Investment Analysis Case Study This case is a group project that is due on April 1, before class at 10.30. Stating the obvious: Each group will turn in one report (sounds obvious, but might as...

Mcdonald's Corporation Monday, November 4, 2019, 5:48 am. Chris Kempczinski walks into the new corporate headquarters for Mcdonald's located in the trendy west-loop section of downtown Chicago. This...

An Investment Analysis Case Study This case is a group project that is due on April 1, before class at 10.30. Stating the obvious: Each group will turn in one report (sounds obvious, but might as...

Hello Can you please help me answer question 5 in the Groupon case study ISSUES IN ACCOUNTING EDUCATION Vol. 29, No. 1 2014 pp. 229-245 American Accounting Association DOI: 10.2308/iace-50595 Growing...

CAPITA MALLS ASIA: A BUYOUT OFFER FROM CAPITALAND ASSIGNMENT QUESTIONS 1. Compute CMA's weighted average cost of capital (WACC). 2. Perform a discounted cash flow (DCF) valuation for CMA. Notes: 1....

Ripley, Inc., costs products using a normal costing system. The following data are available for last year: Overhead is applied on the basis of direct labor hours. Required: 1. What was the...

Determine the specific solutions (if any) to the following equation on the interval 10,2x). 2 cos 29-1=0 Select the correct choice below and, if necessary, fill in the answer box within your choice....

Sawy Dive - ins Lhd , borrowed money by hsuing $ 1 , 0 0 0 , 0 0 0 of 5 $ bonds payable at 9 6 . 5 en October 1 , 2 0 0 4 . The bonde are 1 5 pear bonde and pay hherent esch Aprt t and Oenter ! Bead...

.. .... .. is the capital that a company has from shares rather than from loans. a) Securities b) Equity c) Retained profit d) Earnings per share

(a) Make suggestions about how the $355 might be integrated into the Johnsons budget by making reductions in certain expense categories. (b) If they cannot make room in their budget for a $355...

(a) What sources can Victor and Maria use to access price and reliability information on various makes and models of used cars? (b) What sources of used cars might be available to Victor and Maria,...

It has been almost 15 years since Julia graduated with a major in aeronautical engineering, and now she makes buckets of money working as a project manager for a large defense contracting company....

12 According to government data, the probability that an adult was never in a museum is 15% In a random survey of 10 adults, what is the probability that at least eight were in a museum? 0.820 O...

3. Given information about bonds A, B, and C, please answer the following questions. The bonds have annual coupons and no default risk. a) What is the no arbitrage price of bond D ? b) What are the...

short answer please Question 4 Why cross-docking can save total inventory cost? Edit View Insert Format Tools Table 12ptParagraph 1 pero 1 29 > $ : > Question 5 1 pts Why having a central...