Suppose a firm is equally likely to earn 3 million this

Reference no: EM13581462

Suppose a firm is equally likely to earn $3 million this year or lose $2 million. The firm faces a tax rate of 40% on each dollar of taxable income, and the firm pays no taxes on losses. Again, in this simple one-period scenario, ignore the carryback and carryforward rules. The firm%u2019s expected taxable income is thus a profit of $500,000 calculated as .50($3) + .50(-$2). What is the firm%u2019s expected marginal tax rate?Explain and discuss your results. Why is the firm%u2019s marginal tax rate not 0%? Why is the second firm%u2019s marginal tax rate not 40%.

Reference no: EM13581462

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