Scary Airlines (SA) is a Canadian air freight and logistics firm with pre-tax earnings of $85M in
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Scary Airlines (SA) is a Canadian air freight and logistics firm with pre-tax earnings of $85M in year 1 and $75M in pre-tax earnings in year 2. SA is assessed a 15 percent tax rate on its first $80M of taxable income and 30 percent tax rate on earnings above $80M. If SA hedges its exposure to sudden changes in petroleum, it can fix its pre-tax earnings to equal $80M in year 1 and $80M in year 2. Demonstrate how hedging increases SA's cash flows by comparing its taxes for both years with and without petroleum hedging. For simplicity, you do not have to decrease the SA's earnings for the cost of hedging.
Related Book For
Fundamentals of Corporate Finance
ISBN: 978-0077861629
8th Edition
Authors: Stephen A. Ross, Randolph W. Westerfield, Bradford D.Jordan
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