Estimate the annual tax savings from debt


Pfizer is a large biotechnology company. Until now, Pfizer has been completely equity financed. Management feels that Pfizer is a maturing company with steady earnings, so they are considering adding debt to the capital structure. Specifically, Pfizer is considering issuing $10 billion in debt at 7% to finance share repurchases. Pfizer's market capitalization is $100 billion. There is no risk of bankruptcy. The company's marginal tax rate is 35%.

a. Estimate the annual tax savings from debt.

b. Assuming the company continues to have the same amount of debt forever, what is the present value of this tax shield?

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Finance Basics: Estimate the annual tax savings from debt
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