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

Suppose that firms face a 40% income tax rate on positive profits and that net losses receive no credit. (Thus, if profits are positive, after-tax income is (1âˆ’ 0.4)Ã— profit, while if there is a loss, after-tax income is the amount lost.) Firms A and B have the same cash flow distribution as in the previous problem. Suppose the appropriate effective annual discount rate for both firms is 10%.
a. What is the expected pre-tax profit for A and B?
b. What is the expected after-tax profit for A and B?
c. What would Firms A and B pay today to receive next year's expected cash flow for sure, instead of the variable cash flows described above? For the following problems use the BSCall option pricing function with a stock price of \$420 (the forward price), volatility of 5.5%, continuously compounded interest rate of 4.879%, dividend yield of 4.879%, and time to expiration of 1 year. The problems require you to vary the strike prices.
â€¢XYZ mines copper, with fixed costs of \$0.50/lb and variable cost of \$0.40/lb.
â€¢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.
â€¢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.

View Solution:

Sales0
Views95