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##### Two possible taxable incomes of the Niuniu Company in the coming year are

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Two possible taxable incomes of the Niuniu Company in the coming year are;widely spread out: either \$50,000 with the probability of 0.4 or \$110,000 with the;probability of 0.6. The following table shows its tax structure;Taxable Income Tax Rate;\$0 - \$75,000 10%;\$75,000-100,000 20%;\$100,000-125,000 30%;Above \$125,000 34%;a. Draw Niuniu's income-tax graph and show Niuniu's two possible income-tax;combinations next year on the curve. Moreover, what is the slope of each;portion of the income-tax curve?;b. If Niuniu retains the risk, what is its expected after-tax income in this coming;year? Show the expected income-tax combination with retention in the;income-tax graph you draw for part (a) and label your values properly.;c. If Niuniu hedges risk with zero hedging cost and fixes its taxable income at;\$86,000, what is its expected after-tax income in this coming year? Show the;expected income-tax combination with hedging on the income-tax graph you;draw for parts (b) and label your values properly. Explain the difference in the;expected tax and after-tax income between part (b) and part (c).

Paper#25456 | Written in 18-Jul-2015

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