Question

As a financial analyst, you have to evaluate two firms, Salma & Co and Ahmad & Co.
Both companies will either make $30 million or lose $10 million every year with equal
probability. The companies' profits are perfectly negatively correlated. Calculate the
expected after-tax profits of Salma & Co. in any year, assuming a corporate tax rate of
35% and no tax loss carry back or carry forward.

Answer 1

Calculation of Expected after Tax Profit of Salma & Co.:
Probability of Profit of $ 30 Million is: 0.50
Probability of Loss of $ 10 Million is: 0.50
Expected Profit of Salma & Co. :	$ 30 Million * 0.50 + (-$10 Million *0.50
Expected Profit of Salma & Co. :	$ 15 Million -$ 5 Million
Expected Profit of Salma & Co. :	$ 10 Million
Tax on expected profit : 35% of $ 10 Million = $ 3.5 Million
Hence, Expected profit after Tax: Expected Profit - Tax
Expected profit after Tax : $ 10 Million - $ 3.5 Million
Expected profit after Tax: $ 6.5 Million