Unformatted text preview: The corporate tax rate is 35%. Assume all debt is riskfree. a. What is the equilibrium interest rate? b. In equilibrium, will each group invest in debt or equity? c. What is the market value of all companies? d. What is the total tax bill? 16.19 Consider an economy in which there are four groups of people: The aftercorporate tax required rate of return on allequity financed projects is 6%. Interest income is taxable at the individual level, but equity income is untaxed at the personal level for all investors. Corporations generate annual earnings before interest and taxes (EBIT) of $150 million in perpetuity. The corporate tax rate is 40%. a. What is the range of possible aggregate debtequity ratios in the economy? b. What would your answer to part a be if the corporate tax rate were 30%? Group Investable Funds T B (%) A $357.1 million 50 B $220 million 32.5 C $105 million 10 Group T B (%) Wealth ($ millions) L 50 500 M 40 300 N 20 200 O 500...
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This note was uploaded on 04/04/2009 for the course FIN FIN/554 taught by Professor Timothydreyer during the Summer '06 term at University of Phoenix.
 Summer '06
 TimothyDreyer
 Finance, Interest

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