2. Suppose the tax rate is 30% if taxable income is positive and 0% if taxable income is negative. Thus, the rate structure is steeply progressive. Consider the before-tax payoffs to the following three projects:[1]

a. Riskless: 10% for sure

b. Moderately risky: 30% half the time 10% half the time

c. Quite risky: 300% one time in 10 20% nine times out of 10

Required:

(1) Calculate the before-tax and after-tax expected rates of return for each project.

(2) How does the variability of returns affect the expected tax rate? Why?

(3) Does this tax structure encourage or discourage risky start-up ventures?