Consider Two Firms,Blue and Berry

question 6

Multiple Choice

Consider two firms,Blue and Berry.Both companies will either make $20 million or lose $10 million every year with equal probability.The companies' profits are perfectly negatively correlated,so that in any year,one company makes $20 million and the other loses $10 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 40% and no tax loss carryback or carryforward?

• A)$0
• B)$2 million
• C)$3 million
• D)$5 million
• E)$4 million

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1970s

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