Question
Suppose that firms face a 40% income tax rate on positive profits and 0% on losses. Firm A has a 50% probability of $1500 profit
Suppose that firms face a 40% income tax rate on positive profits and 0% on losses. Firm A has a 50% probability of $1500 profit and a 50% probability of $900 loss each year. Firm B performs risk management, and has a 50% of probability of $500 profit and a 50% probability of a $100 profit each year. Suppose the effective annual interest rate is 5% for firm A. How much would firm A be willing to pay today to receive a cash flow the same as B at the end of the year? (Round your answers to two digits after the decimal point when rounding is necessary)
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