ABC, Inc., financed with both equity and $10 million in perpetual debt, has pretax cash flow estimates for the current year as follows:

Probability Pretax Cash Flow 0.3 $1.5 million 0.5 $2 million 0.2 $4 million The corporate tax rate is 40 percent, the effective personal tax rate on equity is 20 percent, and the interest rate on the perpetual debt is 10 percent. If the expected after-tax cash flows to the debt holders, as a group, is the same as the expected after-tax cash flows to the equity holders, as a group, what is the personal tax rate on debt?

AppendixLO1