Understanding consequence for intel value

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Reference no: EM131546323

In? 2015, Intel Corporation had a market capitalization of $134 billion, debt of $13.2 billion, cash of $13.8 billion, and EBIT of nearly $16 billion. If Intel were to increase its debt by $1 billion and use the cash for a share repurchase, which market imperfections would be most relevant for understanding the consequence for Intel's value? Why? (Choose the best answer below)

A. Intel's debt is a tiny fraction of its total value. Indeed, Intel has more cash than debt, so its net debt is negative. Intel is also very profitable; at an interest rate of 6%, interest on Intel's debt is only $792 million per year, which is less than 4.95% of its EBIT.

B. The risk that Intel will default on its debt is extremely small. This risk will remain extremely small even if Intel borrows an additional $1 billion. Thus, adding debt will not really change the likelihood of financial distress for Intel? (which is nearly zero), and thus will also not lead to agency conflicts.

C. The most important financial friction for such a debt increase is the tax savings Intel would receive from the interest tax shield. A secondary issue may be the signaling impact of the transaction-borrowing to do a share repurchase is usually interpreted as a positive signal that management may view the shares to be underpriced.

D. All of the above.

Reference no: EM131546323

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