Problem:
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%.
Required:
Question 1: Estimate the annual tax savings from debt.
Question 2: Assuming the company continues to have the same amount of debt forever, what is the present value of this tax shield?
Note: Explain in detail and show all computations in proper way.