Consider Two Firms,Blue and Berry

Consider two firms,Blue and Berry.Both companies will either make $20 million or lose $10 million every year with equal probability.The companies' profits are perfectly negatively correlated,so that in any year,one company makes $20 million and the other loses $10 million.If the two firms merge but are run as two independent divisions,what is the change in expected after-tax profits of the combined company (BlueBerry) in any year versus the combined expected after-tax profits of the two separate companies in any year,assuming a corporate tax rate of 40% and no tax loss carryback or carryforward?

A) $0
B) $2 million
C) $3 million
D) $5 million
E) $4 million

Correct Answer:

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