(a) Assume that the assumption of perfect capital markets holds. Copper Inc. currently has 50 million shares outstanding

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A Assume That The Assumption Of Perfect Capital Markets Holds Copper Inc Currently Has 50 Million Shares Outstanding 1 (288.3 KiB) Viewed 86 times

(a) Assume that the assumption of perfect capital markets holds. Copper Inc. currently has 50 million shares outstanding and a market capitalization of $1.25 billion. It also has $750 million in debt outstanding. Copper has decided to delever the firm by issuing new equity and completely repaying all the outstanding debt. You, as a shareholder owning 1,000 shares of Copper stock, disagree with the firm's decision. Describe what you could do to undo the effect of this decision. (8 marks) (b) Iron Corporation currently has no debt on its balance sheet. Iron's marginal tax rate is 30% and the cost of debt is 7%. (i) If Iron were to issue sufficient debt to reduce its taxes by $100 million per year permanently, how much debt would Iron need to issue? What would be the value of the tax shield? (ii) Iron plans to borrow $5 billion on a permanent basis through a leveraged recapitalization in which they would use the borrowed funds to repurchase outstanding shares. Investors pay a tax rate of 35% on their interest income and 15% on their income from capital gains and dividends. Calculate the present value of the interest tax shield from this recapitalization from an investor's perspective.