Consider an economy in which there are three groups of investors and no others.
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.
  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.
  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