What are the required before-tax rates of return

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Question: Following the 1986 Tax Act, the corporate tax rate of 34% was set above the personal tax rate of 28% on ordinary income, and 10% of realized capital gains became taxable at investor's ordinary income rates. What are the required before-tax rates of return (that is, the cost of the equity capital) to corporation and to partnerships if investors require that the after-tax rate of return on investments of similar risk be equal to 15% per year and the typical shareholder holds shares for 8 years? Under what circumstances might we see both a corporation and a partnership producing the same goods and services in the light of these required before-tax rates of return?

Reference no: EM131976892

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