Question

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.