You Are the Manager of a Company That Has an Equal

question 28

Multiple Choice

You are the manager of a company that has an equal chance of earning either $20,000 or $40,000 before taxes.Your firm is subject to a 20% tax rate on the first $30,000 and 35% on all income earned beyond that point.If you are offered a costless hedge to achieve guaranteed before tax earnings of $30,000,what is the expected benefit to hedging?

• A) $24,000
• B) $23,250
• C) $750
• D) none of the above

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Definitions:

Capitalize

To record a cost as an asset, rather than an expense, delaying the recognition of the expense over time through depreciation or amortization.

Trademarks

Distinctive signs or symbols used by a business to identify and differentiate its products or services from those of others.

Intangibles

Non-physical assets possessed by a business, such as patents, trademarks, and copyrights, which have value due to the rights or information they convey.

Indefinite Lives

An accounting classification for intangible assets that are not amortized because their economic benefits are expected to be realized over an unlimited or indeterminate period of time.