Show what each type of firm and investors would do

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Reference no: EM131241462

Let's work a problem that shows how investors and firms sort themselves. Assume that taxable 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 untaxed. How would the arrangement change if the financial markets offered 9% for tax-exempt income?

Reference no: EM131241462

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