The CFO of Microsoft is considering a leveraged recapitalization pitched by Goldman Sachs.

The CFO of Microsoft is considering a leveraged recapitalization pitched by Goldman Sachs. Under the plan, Goldman would underwrite the flotation of a $10 billion bond, with a maturity of 20 years, with the coupon rate equal to the risk-free rate on Treasury bonds, rf =4%.

Microsoft’s debt is viewed by the markets as risk free. At the end of 20 years, Microsoft will “roll- over” the bond. That is, at maturity it will issue a new bond with identical provisions to the first bond. The $10 Billion received for the new bond will be used to cover the principal payment ($10 Billion) due under the terms of the first bond. This process will be repeated every 20 years. In this way, Microsoft’s interest expense into perpetuity will be identical to that on a consol bond with an annual coupon of $400 million.

Microsoft’s estimated corporate tax rate is 36%. Under the terms of the deal, Goldman agrees to place all future bond issues for free. However, it demands up-front compensation for its services. In particular, it demands a fee equal to times the market price of the first bond issued.

a) What is the maximum value of such that the deal is still worth doing from the perspective of Microsoft’s shareholders?

b) What is the value of tax shield from the deal?

c) Extra credit. Now assume that firm’s profits are paid out to shareholders as dividends and the tax rate that shareholders pay on dividend income is estimated to be 15%. Note that, under this assumption, proceeds from issuing the bond will be taxed when paid as dividends. However, further dividends will be reduced by the interest payments and therefore shareholders should pay less dividend income tax in perpetuity. What is the maximum value of ?

Show more

Calculate Your Essay Price
(550 words)

Approximate price: $22

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
$26
The price is based on these factors:
Academic level
Number of pages
Urgency
Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read more

Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

Read more

Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.

Read more

Privacy policy

Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.

Read more

Fair-cooperation guarantee

By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.

Read more