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Consider two? firms, ABC and XYZ. Both companies will either make? $5 million or lose? $2 million every year with equal probability. The? companies' profits

Consider two? firms, ABC and XYZ. Both companies will either make? $5 million or lose? $2 million every year with equal probability. The? companies' profits are perfectly negatively? correlated, so that in any? year, one company makes? $5 million and the other loses? $2 million. The two firms decide to enter into a merger and combine operations. What are the expected after?tax profits of the combined company in any? year, assuming a corporate tax rate of? 35% and no tax loss carryback or? carryforward, if they are run as two independent? divisions?

A. ?$3 million

B. ?$6 million

C. ?$1.95 million

D. ?$6.5 million

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