A Company Has a Current Tax Rate of 30% and Faces

question 31

Multiple Choice

A company has a current tax rate of 30% and faces a 20% chance that the its output prices will drop and it will lose $100,000 over the next year.The firm would then be in a 15% tax bracket if it faces a loss.Compute the net present value (NPV) from purchasing insurance if the rate of interest is 5% and the beta of the output prices is 0.

• A)$2,857
• B)$2,189
• C)$2,357
• D)$2,591
• E)$2,062

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