Consider two firms, Yin Corporation and Yang Corporation. Both corporations will either make $50 million or lose
Question:
Consider two firms, Yin Corporation and Yang Corporation. Both corporations will either make $50 million or lose $20 million every year with equal probability. The only difference is that the firms’ profits are perfectly negatively correlated. That is, any year Yang Corporation earns $50 million, Yin Corporation loses $20 million, and vice versa. Assume that the corporate tax rate is 34%. What are the total expected after-tax profits of both firms when they are two separate firms? What are the expected after-tax profits if the two firms are combined into one corporation called Yin-Yang Corporation, but are run as two independent divisions?
(Assume it is not possible to carry forward any losses.)
Step by Step Answer:
Fundamentals Of Corporate Finance
ISBN: 9781292437156
5th Global Edition
Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford