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?