Liability insurance and expected after tax earnings
Suppose that the Lai Jean Co. expects before tax earnings of 5 million this coming year, assuming no liability losses. However, there is a 2 percent chance that Lai will lose a $10 million lawsuit during the year. Profits are taxed at a rate of 34 percent. Assume that Lai cannot carry losses forward or backward (e.g., it has had no profits in the past and it expects to close down next year). Would liability insurance with a $10 million limit for a premium of $225,000 increase expected after-tax earnings for this coming year? (Assume the negative earnings are taxed at a rate of zero percent).
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If the company loses the lawsuit, the liability insurance policy will definitely help in increasing the after tax earnings because it will not only prevent the company from bearing the liability of $10m arising due to the lawsuit, but the insurance ...
Solution Summary
Suppose that the Lai Jean Co. expects before tax earnings of 5 million this coming year, assuming no liability losses. However, there is a 2 percent chance that Lai will lose a $10 million lawsuit during the year. Profits are taxed at a rate of 34 percent. Assume that Lai cannot carry losses forward or backward (e.g., it has had no profits in the past and it expects to close down next year). Would liability insurance with a $10 million limit for a premium of $225,000 increase expected after-tax earnings for this coming year? (Assume the negative earnings are taxed at a rate of zero percent).
... and disclosure of contingent assets and liabilities at the ... an asset equal to the cumulative insurance premiums that ... lives because they are expected to generate ...
... Compute the expected new net income ... Merchandise inventory 26,200 Prepaid insurance 6,000 Total ...Liabilities and Stockholders' Equity Current liabilities Accounts ...
... Deferred tax liability = $84,000 × .40 = $33,600. ... The insurance expense will be deducted for 84,000/3 ... The expected return on plan assets and the settlement rate ...
... and credits ALWAYS equal AND Assets = Liabilities + Equity: Your ... It is expected that one-half month will be 9 ...Insurance costing $18,000 was purchased on 6/1/11 ...
... equity 462,920 459,222 Total liabilities, net assets ... full-year earnings forecast, as insurance premiums kept ... the company gained fewer than expected new members ...
... other operating expenses (other current liabilities) are $1,130,000 11 ... Finished goods inventory is expected to increase ... $8,000 7. Due to insurance rate increases ...
... 9,000 27,000 4,498 Utilities are expected to be 3 ... labor) Insurance 3,000 15,000 15,000 Insurance will increase ... Income before taxes Assets, Liabilities & Equity ...
... of par 30 Retained earnings 110 Total liabilities and equity ... will yield 6.6 percent to the insurance company. ... Ewing's dividends are expected to increase at an ...
