ALC Corp. has assets in place that's worth $800 million. It also has intangible assets worth...

 

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ALC Corp. has assets in place that's worth $800 million. It also has intangible assets worth $200 million, making the total value of the firm $1 billion. Because the company locates in a flood zone, there is a 30% chance that the company's equipment is badly damaged and the firm is bankrupt. ALC is weighing pros and cons about buying a flood insurance. Please answer the following two questions. First, suppose that Nobody Insurance offers a policy charging a 50% loading at the top of expected claim costs. As ALC's risk manager, will you buy the insurance from Nobody Insurance based on firm value maximization principle? Second, what would be the percentage loading that makes ALC indifferent between buying and not buying flood insurance. ALC Corp. has assets in place that's worth $800 million. It also has intangible assets worth $200 million, making the total value of the firm $1 billion. Because the company locates in a flood zone, there is a 30% chance that the company's equipment is badly damaged and the firm is bankrupt. ALC is weighing pros and cons about buying a flood insurance. Please answer the following two questions. First, suppose that Nobody Insurance offers a policy charging a 50% loading at the top of expected claim costs. As ALC's risk manager, will you buy the insurance from Nobody Insurance based on firm value maximization principle? Second, what would be the percentage loading that makes ALC indifferent between buying and not buying flood insurance.

Answer rating: 100% (QA)

As the risk manager of ALC Corp lets analyze the decision to buy flood insurance based on the firm v... View the full answer