Suppose that Thomas Lee Corp. expects to have profits of $100000 if it is not sued over the coming year. The probability of a suit is 0.04 and the loss if a suit occurs is $250000. The firms tax rate if it earns positive profits is 30%. If it makes negative profits, it pays a 0% rate.

1. What is Lees before tax expected profit without insurance? What is its after-tax expected profit without insurance?

2. Suppose Thomas Lee Corp. can purchase a liability insurance policy with $200,000 coverage for a premium of $10000. What is the firms expected before- and after-tax profit if it purchases the insurance policy (assume that the premium is a tax- deductible expense)?