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CAN SOMEONE EXPLAIN THE MATH TO ME HOW THEY FOUND THE CALCULATIONS FOR ALL OF THE EXPECTED VALUES GIVEN? I AM CONFUSED ABOUT THE CALCULATIONS
CAN SOMEONE EXPLAIN THE MATH TO ME HOW THEY FOUND THE CALCULATIONS FOR ALL OF THE EXPECTED VALUES GIVEN? I AM CONFUSED ABOUT THE CALCULATIONS USED. THANL YOU!
Suppose an extremely progressive system that imposes a 34% tax on positive earnings and zero tax on negative earnings. Further, assume that a company will have earnings of $10M. However, a possible loss costs $30M and occurs with 2% probability, resulting in -$20M in earnings. Consider a full insurance policy for the loss that is available at a premium of $600,000. Will the company want to purchase the insurance policy? To answer this question, we need to see whether expected earnings are higher or lower with insurance. Without Insurance. Expected after-tax earnings are $6.068M. State No Loss Loss Expected No Insurance Probability Earnings Tax 0.98 10,000,000 3,400,000 0.02 -20,000,000 0 9,400,000 3,332,000 After-Tax Earnings 6,600,000 -20,000,000 6,068,000 Suppose an extremely progressive system that imposes a 34% tax on positive earnings and zero tax on negative earnings. Further, assume that a company will have earnings of $10M. However, a possible loss costs $30M and occurs with 2% probability, resulting in -$20M in earnings. Consider a full insurance policy for the loss that is available at a premium of $600,000. Will the company want to purchase the insurance policy? To answer this question, we need to see whether expected earnings are higher or lower with insurance. Without Insurance. Expected after-tax earnings are $6.068M. State No Loss Loss Expected No Insurance Probability Earnings Tax 0.98 10,000,000 3,400,000 0.02 -20,000,000 0 9,400,000 3,332,000 After-Tax Earnings 6,600,000 -20,000,000 6,068,000
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