Intel Corp. uses almost no debt and had a total market capitalization of about $20 billion in March 2007. Assume that Intel faces a 35% tax rate on corporate earnings. Ignore all elements of the decision except the corporate tax savings.
1. By how much could Intel managers increase the value of the firm by issuing $10 billion in bonds (which would be rolled over in perpetuity) and simultaneously repurchasing $10 billion in stock? $ ___ billion
2. Suppose the personal tax rate on equity income, as faced by Intel shareholders, is 15% and that the personal tax rate on interest income is 40%. Recalculate the gains to Intel from replacing $10 billion of equity with debt.
Round your answer to two decimal places. $ ___ billion