16.21 Consider an economy in which there are four groups of people:

All investors can earn a tax-free return of 6 percent by investing in foreign real estate.
Interest payments are taxable at the individual level, but equity income is untaxed at the personal level for all investors.
Corporations receive pretax cash flows of interest totaling $150 million. Interest payments are tax deductible at the corporate level. There are no depreciation deductions.
Firms have no growth opportunities, and their plants are everlasting. The corporate tax rate is 40 percent.

a. What is the range of possible aggregate debt-equity ratios in the economy?

b. What would your answer to

(a) be if the corporate tax rate is 30 percent?

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Group Marginal Tax Rate (percent) Wealth (in $ millions) L M N 20 0 8420 50 700 40 300 200 500