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

question 6

Multiple Choice

A company has a current tax rate of 30% and faces a 15% 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 10% 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)$1932
• B)$2178
• C)$2857
• D)$2591
• E)$3122

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Definitions:

Reaction Formation

A psychological defense mechanism where an individual expresses feelings or behaviors that are opposite to their true feelings or desires, often to hide those true feelings.

Defence Mechanisms

Psychological strategies used unconsciously to protect oneself from anxiety arising from unacceptable thoughts or feelings.

Hatred

An intense dislike or ill will towards a person, group, or object, often characterized by hostility.

Repression

A defense mechanism where undesirable thoughts, memories, or desires are unconsciously blocked from conscious awareness.