Consider an economy in which there are four groups of people:
The required rate of return after corporate tax on all-equity financed projects is 8 percent. Interest income is taxable at the individual level, but equity income is untaxed at the personal level for all investors. Corporations generate annual EBIT of $145 million in perpetuity. The corporate tax rate is 38 percent.
a. What is the range of possible aggregate debt-to-equity ratios in the economy?
b. What would your answer to (a) be if the corporate tax rate were 27 percent?

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