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Part 1

Assume that Microsoft has a total market value of 

​$1 comma 9001,900 

billion and a marginal tax rate of 

21 %21%. 

If it permanently changes its leverage from no debt by taking on new debt in the amount of 

13.2 %13.2% 

of its current market​ value, what is the present value of the tax shield it will​ create?

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Part 1

The present value of the tax shield is 

​$enter your response here 

billion. ​ (Round to two decimal​ places.)

To calculate the present value of the tax shield created by Microsoft taking on new debt, we use the formula for the present value of a tax shield:

\[
PV_{\text{tax shield}} = \text{Debt} \times \text{Tax Rate}
\]

Where:
- **Debt** = $ 13.2\% $ of Microsoft's market value.
- **Tax Rate** = 21%.

### Step 1: Calculate the total debt
Given that Microsoft's total market value is $ 1,900 $ billion dollars, the amount of debt is:

\[
\text{Debt} = 13.2\% \times 1,900 \text{ billion} = \frac{13.2}{100} \times 1,900 = 250.8 \text{ billion}
\]

### Step 2: Calculate the present value of the tax shield
Now that we know the amount of debt, we multiply it by the tax rate:

\[
PV_{\text{tax shield}} = 250.8 \times 21\% = 250.8 \times 0.21 = 52.67 \text{ billion}
\]

Thus, the present value of the tax shield is:

\[
\boxed{52.67 \text{ billion}}
\]

Let me know if you need further details or have any questions!

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Here are 5 related questions to consider:
1. How does increasing leverage impact a company’s cost of capital?
2. What other factors, besides taxes, influence a company’s decision to take on debt?
3. How does the present value of a tax shield change with varying tax rates?
4. What are the risks of increasing leverage in terms of financial stability?
5. How would the tax shield change if Microsoft’s market value fluctuated?

**Tip**: The tax shield benefit is one reason why firms use debt in their capital structure—it reduces their effective tax burden!

Assume that Microsoft has a total market value of $1,900 billion and a marginal tax rate of 21%. If it permanently changes its leverage from no debt by taking on new debt in the amount of 13.2% of its current market value, what is the present value of the tax shield it will create? The present value of the tax shield is $_____ billion. (Round to two decimal places.)

Learn how to calculate the present value of the tax shield when Microsoft changes its leverage by taking on debt worth 13.2% of its $1,900 billion market value, with a 21% marginal tax rate. This detailed solution covers key finance concepts, including leverage and tax shield calculation.

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