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Consumer Energy Corp. is an electric utility that uses natural gas to produce electricity. If the firm does not hedge its exposure to natural gas
Consumer Energy Corp. is an electric utility that uses natural gas to produce electricity. If the firm does not hedge its exposure to natural gas prices, it will have taxable income in the coming year of $80 million if the market price of natural gas is low and -$20 million if the market price of natural gas is high. The probability of each outcome is 50%. The firm has a corporate tax rate of 40% and cannot carry its losses forward. What is the firms expected net (after-tax) income for the coming year, assuming it does not hedge.
$30,000,000 | ||
-$1,000,000 | ||
$14,000,000 | ||
$6,000,000 | ||
$18,000,000 |
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