Consider Two Firms,ABC and XYZ

Multiple Choice

Consider two firms,ABC and XYZ.Both companies will either make $5 million or lose $2 million every year with equal probability.The companies' profits are perfectly negatively correlated,so that in any year,one company makes $5 million and the other loses $2 million.The two firms decide to enter into a merger and combine operations.What are the expected after-tax profits of the combined company in any year,assuming a corporate tax rate of 35% and no tax loss carryback or carryforward,if they are run as two independent divisions?

A) $6 million
B) $3.25 million
C) $6.5 million
D) $3 million
E) $1.95 million