# Question: Suppose that firms face a 40 income tax rate on

Suppose that firms face a 40% income tax rate on all profits. In particular, losses receive full credit. Firm A has a 50% probability of a \$1000 profit and a 50% probability of a \$600 loss each year. Firm B has a 50% probability of a \$300 profit and a 50% probability of a \$100 profit each year.
a. What is the expected pre-tax profit next year for firms A and B?
b. What is the expected after-tax profit next year for firms A and B?
•XYZ mines copper, with fixed costs of \$0.50/lb and variable cost of \$0.40/lb.
•Wirco produces wire. It buys copper and manufactures wire. One pound of copper can be used to produce one unit of wire, which sells for the price of copper plus \$5. Fixed cost per unit is \$3 and noncopper variable cost is \$1.50.
•Telco installs telecommunications equipment and uses copper wire fromWirco as an input. For planning purposes, Telco assigns a fixed revenue of \$6.20 for each unit of wire it uses.
The 1-year forward price of copper is \$1/lb. The 1-year continuously compounded interest rate is 6%. One-year option prices for copper are shown in the table below.17
In your answers, at a minimum consider copper prices in 1 year of \$0.80, \$0.90, \$1.00, \$1.10, and \$1.20.

Sales0
Views136