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 the combined company (Thither and Yon) in any year, assuming a corporate tax rate of 35% and no tax loss carry back or carry forward?

Question

Quizplus · Accepted Answer

B) The combined company will earn 0.5 × $30 million + 0.5 × -$10 million = $10 million every year.
Expected after-tax profit = (1 - 0.35) × $10 million = $6.5 million

Consider Two Firms, Thither and Yon