(1) Assume the company could purchase a zero-loading insurance policy. How much tax saving by purchasing the insurance policy? 

(2) What if the insurance policy has a 30% loading?

The marginal tax rate of a firm is displayed as below:

Taxable Income -- Tax rate

$0 - $5 -- 10%

$5 - $10 --20%

$10 - --30%

A firm has its taxable income as the following:

Probability ---Pre-tax income

0.4--- $10m

0.6--- $30m

The marginal tax rate of a firm is displayed as below:

Taxable Income -- Tax rate

$0 - $5 -- 10%

$5 - $10 --20%

$10 - --30%

A firm has its taxable income as the following:

Probability ---Pre-tax income

0.4--- $10m

0.6--- $30m

(1) Assume the company could purchase a zero-loading insurance policy. How much tax saving by purchasing the insurance policy? (2) What if the insurance policy has a 30% loading?

Answer rating: 100% (QA)

Answer Working Note 1Calculaton of Average Expected Income Probability Pre... View the full answer