Consider Two Firms,Blue and Berry

question 50

Multiple Choice

Consider two firms,Blue and Berry.Both companies will either make $25 million or lose $5 million every year with equal probability.The companies' profits are perfectly negatively correlated,so that in any year,one company makes $25 million and the other loses $5 million.If the two firms merge but are run as two independent divisions,what is the change in expected after-tax profits of the combined company (BlueBerry) in any year versus the combined expected after-tax profits of the two separate companies in any year,assuming a corporate tax rate of 30% and no tax loss carryback or carryforward?

• A)$1.5 million
• B)$7.75 million
• C)$0.75 million
• D)-$5.5 million
• E)$0

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Definitions:

Savings Account

A deposit account held at a financial institution that provides principal security and a modest interest rate.

Semiannual Payments

Payments made twice a year, often used in the context of bond interest payments or certain types of loans.

Compounded Semiannually

Interest calculation method where interest is added to the principal sum of a deposit or loan twice a year, resulting in interest earning interest.

Compounded Annually

A method of calculating interest where the interest earned each year is added to the principal, leading to an increase in the amount of interest earned in subsequent years.