Problem:
Wolverine Manufacturing is an all equity firm that had a loss of $1 million this year. This loss can be carried forward against next years income. There is a 50% chance that wolverine will have a pre-tax income of $2 million next year and a 50% that their pre-tax income will be $500,00 next year. The corporate tax rate is 40% and there are no personal taxes. If Wolverine takes on $2,000,000 in debt that promises a 10% annual interest payment,
Required:
Question 1: What are the expected corporate tax savings for next year?
Note: Please provide reasons to support your answer.