Before Takeover

1. Compute Ying Co. after-tax profits (orlosses if negative):
   • At the "up" state : $________million.
   • At the "down" state: $_________million.
   • What are the expected after-tax profits at "t=0"? (value-weightusing states' probabilities) A: $_________million.
2. Compute Yang Co. after-tax profits (orlosses if negative) :
   • At the "up" state : $________million.
   • At the "down" state: $_________million.
   • What are the expected after-tax profits at "t=0"? A:$__________million.
3. Note that the companies aggregate after-taxprofits expected at "t=0" adds up to $13 million.(use this to double check your previous results)

After Takeover

1. Compute Ying-Yang Co. after-taxprofits (or losses if negative):
   • At the "up" state : $_________million.
   • At the "down" state: $________million.
   • What are the expected after-tax profits at "t=0"? A:$??million.??(verify that your answer islarger than $13 million)

Tax Savings Synergies This question illustrates how the merge of two firms can produce gains coming from lower tax payments. This, if the firms' cash-flows are sufficiently uncorrelated. Information Assume a very simple economy which lasts one period more, and has two equally- likely states: "up" and "down". The following figure shows the before-taxes profits of Ying Co. and Yang Co.: Before Takeover Ying t=0 up p=1/2 down 50 -20 Yang t=0 1/2 , -20 50 After Takeover Ying Yang t=0 1/2 30 30 If the corporate tax rate applied to positive profits is 34% (recall that in practice companies' losses do not pay taxes); compute the merge synergies by answering the following parts. Express your answers using 1 decimal place.