The MakeStuff Company's Earnings Stream Is Highly Dependent on the Cost

question 25

Multiple Choice

The MakeStuff Company's earnings stream is highly dependent on the cost of a key commodity input. Management believes taxable earnings will be $100,000 if the input price is low, taxable earnings will be $50,000 if the input price is at a moderate level, but earnings will be zero if the input price is high. Management sees these outcomes as being equally likely. The company pays a 15% tax rate on the first $50,000 of taxable earnings, and a 25% rate on all earnings above $50,000.
-What is MakeStuff's expected after tax earnings if it remains unhedged?

• A) $50,000
• B) $42,500
• C) $80,000
• D) $40,833

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Definitions:

Aggregate Demand

The total demand for all goods and services within a particular market or economy.

Government Impact

Refers to the effects of government policies and actions on an economy's performance and the well-being of its citizens.

Marginal Propensity

Marginal propensity refers to the proportion of an additional income that an individual consumes rather than saves.

Additional Income

Income that is received in addition to the primary source of income, such as earnings from side jobs or investments.