Consider an Economy in Which There Are Three Groups of Investors

Essay

Consider an economy in which there are three groups of investors and no others.
$$\begin{array} { l l c } & \underline{\text { Marginal tax rate }} & \underline{\text { Personal wealth }} \\ \text { Group } & \text { on bonds } & \text { (\$ millions) } \\\text { Plumbers } & 60 \% & 2,500 \\\text { Doctors } & 50 \% & 700 \\\text { Lawyers } & 40 \% & 100\end{array}$$ There are no personal taxes on income from stocks.An investment is available that pays a tax-free 4%.The corporate tax rate is 50%.Total corporate income before earnings and taxes (EBIT) is $224 million forever.What is the maximum debt-to-equity ratio for the economy as a whole?