F4. Sonic Corporation imports materials from a Nigerian supplier. Assume that it is 2020 and Sonic Corporation is worried that the Nigerian supplier may enter into a long-term contract with Chinese customer to sell all of their output to the Chinese customers, hence cutting off Sonic Corporation's supply. In the event of such a contract with the Chinese customers, Sonic Corporation will face much higher costs for its raw materials causing its operating profits to decline substantially and its marginal tax rate to fall from its current level of 25% down to 10%. An insurance firm has agreed to write a trade insurance policy that will pay Sonic Corporation $3,700,000 in the event of the Nigerian supply of materials being cut off. The chance of the Nigerian supply being cut off is estimated to be 30%, with a beta of -1.50. The risk-free rate of interest is 3% and the return on the market is estimated to be 10%. What is Sonic's NPV for purchasing this policy? (Hint: you need to determine the actuarially fair insurance premium before determining the NPV) $184,951.66 $182,475.83 $180,000.00 $177,638.16 $175,276.32
F4.
Sonic Corporation imports materials from a Nigerian supplier. Assume that it is 2020 and Sonic Corporation is worried that the Nigerian supplier may enter into a long-term contract with Chinese customer to sell all of their output to the Chinese customers, hence cutting off Sonic Corporation's supply. In the event of such a contract with the Chinese customers, Sonic Corporation will face much higher costs for its raw materials causing its operating profits to decline substantially and its marginal tax rate to fall from its current level of 25% down to 10%. An insurance firm has agreed to write a trade insurance policy that will pay Sonic Corporation $3,700,000 in the event of the Nigerian supply of materials being cut off. The chance of the Nigerian supply being cut off is estimated to be 30%, with a beta of -1.50. The risk-free rate of interest is 3% and the return on the market is estimated to be 10%. What is Sonic's
$184,951.66
$182,475.83
$180,000.00
$177,638.16
$175,276.32
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