Final answer:
If there is no deduction for the required rate of return on equity, this usually results in increased profitability but may not increase shareholder value. The demand for borrowing and R&D investment would likely be lower without external benefits. A rise in the supply of funds in the financial market leads to a decline in interest rates.
Step-by-step explanation:
When there is no corresponding deduction for the required rate of return on equity, this typically leads to Increased profitability for the company. This is because the cost of equity is not expensed in the same way that interest on debt is, which can lead to higher reported earnings. However, this does not necessarily imply an increased value to shareholders, as they may require a higher return on their investment in the absence of a tax shield from debt interest deductions. Regarding the demand for borrowing and investing in R&D with no external benefits, it is likely to be lower because firms anticipate obtaining the full benefit of their investment without additional externalities to incentivize them further. Changes in the financial market that lead to a decline in interest rates include a rise in the supply of funds in this market. When lenders increase the supply of money available to be borrowed, it generally leads to lower interest rates as lenders compete to provide loans to borrowers.