In the year just past (Year 1 ) Kaos Corp had no debt. Today is Januar

In the year just past (Year 1 ) Kaos Corp had no debt. Today is January 1 of Year 2. Kaos is considering a plan to sell bonds worth $25B and use the proceeds to repurchase 2.5B shares (on the open market at $10/share).

If Kaos 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 6% and that the tax rate is 15%.
A) $0.23B
B) $3.75B
C) $6.0B
D) $21.25B
E) $25B

ANSWER

B