Consider Two Firms, Thither and Yon

Multiple Choice

Consider two firms, Thither and Yon. Both companies will either make $30 million or lose $10 million every year with equal probability. The companies' profits are perfectly negatively correlated. What are the expected after-tax profits of the combined company (Thither and Yon) in any year, assuming a corporate tax rate of 35% and no tax loss carry back or carry forward?

A) $19.5 million
B) $6.5 million
C) $4.75 million
D) -$6.5 million