ABC Inc., an exporting firm, expects to earn $20 million if the dollar depreciates, but only $10 million if the dollar appreciates. Assume that the dollar has an equal chance of appreciating or depreciating. Calculate the expected tax of ABC if it is operating in a foreign country that has progressive corporate taxes as shown below: Corporate income tax rate = 15% for the first $7,500,000.
Corporate income tax rate = 30% for earnings exceeding $7,500,000.
A)$3,375,000
B)$6,000,000
C)$1,500,000
D)$4,500,000

Question

Quizplus · Accepted Answer

The expected earnings are $15 million (average of $20 million and $10 million). Tax for $7.5 million at 15% is $1,125,000. Tax for the remaining $7.5 million at 30% is $2,250,000. Total expected tax is $3,375,000.

ABC Inc, an Exporting Firm, Expects to Earn $20 Million If