Question: PLEASE SHOW ALL FULL WORKINGS a. ABC Corp. has expected earnings before interest payments for the next year equal to $300 million if it does

PLEASE SHOW ALL FULL WORKINGS

PLEASE SHOW ALL FULL WORKINGS a. ABC Corp. has expected earnings before

a. ABC Corp. has expected earnings before interest payments for the next year equal to $300 million if it does not lose a product liability lawsuit. Interest and principal payment on its debt equal to $180 million, leaving $120 million for shareholders if it does not lose a product liability lawsuit. The probability of losing a product liability lawsuit is 0.06 and the expected damage if a suit is lost is equals $40 million. If the suit is lost, the firm will be unable to make its promised payments to debt holders and it will have to renegotiate its debt payments. The legal and administrative costs of renegotiations (including the costs of manager's time) equal $15 million. Should Ambrose Motor purchase a liability insurance policy with a $40 million limit for a premium of $3.6 million? Explain. (10 Marks)

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