# Question: Your firm faces a 9 chance of a potential loss

Your firm faces a 9% chance of a potential loss of $10 million next year. If your firm implements new policies, it can reduce the chance of this loss to 4%, but these new policies have an upfront cost of $100,000. Suppose the beta of the loss is 0, and the risk-free interest rate is 5%.

a. If the firm is uninsured, what is the NPV of implementing the new policies?

b. If the firm is fully insured, what is the NPV of implementing the new policies?

c. Given your answer to part (b), what is the actuarially fair cost of full insurance?

d. What is the minimum-size deductible that would leave your firm with an incentive to implement the new policies?

e. What is the actuarially fair price of an insurance policy with the deductible in part (d)?

a. If the firm is uninsured, what is the NPV of implementing the new policies?

b. If the firm is fully insured, what is the NPV of implementing the new policies?

c. Given your answer to part (b), what is the actuarially fair cost of full insurance?

d. What is the minimum-size deductible that would leave your firm with an incentive to implement the new policies?

e. What is the actuarially fair price of an insurance policy with the deductible in part (d)?

## Relevant Questions

See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.a. What is Mydeco’s market capitalization at the end of each year?b. What is Mydeco’s market-to-book ratio at the end of each year?c. ...See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.a. In what year was Mydeco’s net income the lowest?b. In what year did Mydeco need to reduce its cash reserves?c. Why did Mydeco need to ...BHP Billiton is the world’s largest mining firm. BHP expects to produce 2 billion pounds of copper next year, with a production cost of $0.90 per pound.a. What will be BHP’s operating profit from copper next year if the ...You have been hired as a risk manager for Acorn Savings and Loan. Currently, Acorn’s balance sheet is as follows (in millions of dollars):When you analyze the duration of loans, you find that the duration of the auto ...Apple Corporation had no debt on its balance sheet in 2011, but paid $8 billion in taxes. Suppose Apple were to issue sufficient debt to reduce its taxes by $1 billion per year permanently. Assume Apple’s marginal ...Post your question