Consider two firms, Thither and Yon. Both companies will either make $30 million or lose $10 million every year with equal probability. The companies' profits are perfectly negatively correlated. What are the expected after-tax profits of Thither in any year, assuming a corporate tax rate of 35% and no tax loss carry back or carry forward?

Question

Quizplus · Accepted Answer

C) After tax profits if the company earns $30 million = $30 × (1 -.35) = $19.5 million.
After tax profits if the company loses $10 million = -$10 million (no carry back or forward).
Expected after tax profit = 0.5 × $19.5 million + 0.5 × (-$10 million) = $4.75 million

Consider Two Firms, Thither and Yon