5. Suppose that a firm needs to attract investment to buy land. The nominal interest rate on the firms debt is 4 percent. The proportion of the investment financed by debt is 30 percent, the shareholders nominal required rate of return on equity is 8 percent, and the inflation rate is 3 percent. (30 points)

a. What is the minimum rate of return needed to attract the funds from investors to finance buying the land?

For parts b-c, consider a corporate tax system with the following features:

• The statutory corporate income tax rate is u = 0.27.

• There is no investment tax credit (ITC) for buying land.

• Nominal interest payments on the firms debt are tax-deductible, but the opportunity cost

  of equity finance is not. Note that provincial sale taxes do not fall on land purchases.

2. Find the before-tax rate of return that will generate the after-tax hurdle rate of return required by the firms stakeholders. What is the Marginal Effective Tax Rate (METR) in this case?

3. Explain in plain English, what is the impact of a reduction in statutory corporate tax rate on METR?