Consider an economy in which there are three groups of investors and no others.
$$\begin{array} { l l c }
& \underline{\text { Marginal tax rate }} & \underline{\text { Personal wealth }} \
\text { Group } & \text { on bonds } & \text { (\$ millions) } \
\text { Plumbers } & 60 \% & 2,500 \
\text { Doctors } & 50 \% & 700 \
\text { Lawyers } & 40 \% & 100
\end{array}$$ There are no personal taxes on income from stocks.An investment is available that pays a tax-free 4%.The corporate tax rate is 50%.Total corporate income before earnings and taxes (EBIT) is $224 million forever.What is the maximum debt-to-equity ratio for the economy as a whole?

Question

Consider an economy in which there are three groups of investors and no others.
$$\begin{array} { l l c } 
& \underline{\text { Marginal tax rate }} & \underline{\text { Personal wealth }} \
 \text { Group } & \text { on bonds } & \text { (\$ millions) } \
\text { Plumbers } & 60 \% & 2,500 \
\text { Doctors } & 50 \% & 700 \
\text { Lawyers } & 40 \% & 100
\end{array}$$ There are no personal taxes on income from stocks.An investment is available that pays a tax-free 4%.The corporate tax rate is 50%.Total corporate income before earnings and taxes (EBIT) is $224 million forever.What is the maximum debt-to-equity ratio for the economy as a whole?

Quizplus · Accepted Answer

The Answer of Consider an economy in which there are three groups of investors and no others.
$$\begin{array} { l l c } 
& \underline{\text { Marginal tax rate }} & \underline{\text { Personal wealth }} \
 \text { Group } & \text { on bonds } & \text { (\$ millions) } \
\text { Plumbers } & 60 \% & 2,500 \
\text { Doctors } & 50 \% & 700 \
\text { Lawyers } & 40 \% & 100
\end{array}$$ There are no personal taxes on income from stocks.An investment is available that pays a tax-free 4%.The corporate tax rate is 50%.Total corporate income before earnings and taxes (EBIT) is $224 million forever.What is the maximum debt-to-equity ratio for the economy as a whole?

Consider an Economy in Which There Are Three Groups of Investors