19. For an old, established firm in a stable industry, where productive plant an

Question

19. For an old, established firm in a stable industry, where productive plant and equipment maintain their market values for long periods and tax depreciation equals market depreciation, a rise in the corporate income tax rate in a given year a. tends to increase the firm’s demand for productive equipment that is financed by debt. b. tends to decrease the firm’s demand for productive equipment that is financed by debt. c. tends to increase the firm’s demand for productive equipment that is financed by retained earnings. d. tends to decrease the firm’s demand for productive equipment that is financed by retained earnings. e. none of the above.

20. Justify your answer to problem 19.

Explanation / Answer

The correct answer is option (A). A rise in the corporate income tax rate in a given year tends to increase the firm’s demand for productive equipment that is financed by debt. It is justified from the fact that the corporates increases their revenues by increasing the demand and supply of the product.

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