Suppose the country's corporate income tax system is such that a tax rate of 20% applied...

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Suppose the country's corporate income tax system is such that a tax rate of 20% applied to the first $10 million of earnings and 40% for earnings exceeding $10 million. This is a simple progressive tax structure. Consider an exporting firm (firm A) that expects to earn $15 million if the dollar depreciates, but only $5 million if the dollar appreciates. Suppose firm B is identical to A, but it hedges risk exposure, so it can expect to realize a certain earnings of $10mil. Q: If the prob of the dollar depreciating/appreciating is 50%, what is firm A's expected tax payment? Firm B's expected tax payment? Suppose the country's corporate income tax system is such that a tax rate of 20% applied to the first $10 million of earnings and 40% for earnings exceeding $10 million. This is a simple progressive tax structure. Consider an exporting firm (firm A) that expects to earn $15 million if the dollar depreciates, but only $5 million if the dollar appreciates. Suppose firm B is identical to A, but it hedges risk exposure, so it can expect to realize a certain earnings of $10mil. Q: If the prob of the dollar depreciating/appreciating is 50%, what is firm A's expected tax payment? Firm B's expected tax payment?

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SOLUTION For Firm A If dollar depreciates probability 50 Earnings 15 million Tax on f... View the full answer