Question
Goldmines Inc. (fictitious name) makes a pretax profit of $150 million when gold prices increase (which happens with probability 0.5) but zero otherwise. Alternatively, the
Goldmines Inc. (fictitious name) makes a pretax profit of $150 million when gold prices increase (which happens with probability 0.5) but zero otherwise. Alternatively, the company can hedge with gold futures and have a known profit of $70 million. Suppose that Goldmines has accumulated losses totaling $30 million. It can deduct this loss from this years profit and thus lower its tax burden. If unutilized this opportunity disappears. Assuming a tax rate of 30 percent, the expected after-tax profit for an unhedged firm and the after-tax profit for a hedged firm, respectively, are: Group of answer choices
a. $50 million for the unhedged firm and $49 million for the hedged firm
b. $55 million for the unhedged firm and $54 million for the hedged firm
c. $57 million for the unhedged firm and $59 million for the hedged firm
d. $57 million for the unhedged firm and $58 million for the hedged firm
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