Q 17.42. Let's work a problem that shows how investors and firms sort themselves. Assume that tax- able and tax-exempt firms each earn $1 of income. Assume that the financial markets offer 8% for tax- exempt income and 10% for taxable income. Assume that taxable firms and taxable investors are both taxed at 33.3%. Show what each type of firm and investors would do. Assume that capital gains are entirely un- taxed. How would the arrangement change if the financial markets offered 9% for tax-exempt income?