In the year just past (Year 1 ) Hane Heavy Industries had no debt. Tod

In the year just past (Year 1 ) Hane Heavy Industries had no debt. Today is January 1 of Year 2. Hane is considering a plan to sell bonds worth $30B and use the proceeds to repurchase 2B shares (on the open market at $15/share).

If Hane maintains this new level of debt in perpetuity, then what is the present value of the resulting interest tax shields? Assume that the debt is sold immediately, that the bonds are a perpetuity, and that interest is paid at the end of each year. Assume that the coupon rate on the bonds is 3.5% and that the tax rate is 13%.
A) $3.9B
B) $7.8B
C) $13.7B
D) $26.1B
E) $30B

ANSWER

A