The William Companies (WMB) owns and operates natural gas pipelines that deliver 12% of the natural gas consumed in the U.S. WMB is concerned that a major hurricane could disrupt their Gulfstream pipeline, which runs 691 miles through the Gulf of Mexico. In the event of a disruption, the firm anticipates a loss of profits of $90 million. Suppose the likelihood of a disruption is 4.0% per year, and the beta associated with such a loss is -0.25. If the risk-free interest rate is 5.5% and the expected return of the market is 11.5%, what is the actuarially fair insurance premium?

The William Companies (WMB) owns and operates natural gas pipelines that deliver 12% of the natural gas consumed in the U.S. WMB is concerned that a major hurricane could disrupt their Gulfstream pipeline, which runs 691 miles through the Gulf of Mexico. In the event of a disruption, the firm anticipates a loss of profits of $90 million. Suppose the likelihood of a disruption is 4.0% per year, and the beta associated with such a loss is -0.25. If the risk-free interest rate is 5.5% and the expected return of the market is 11.5%, what is the actuarially fair insurance premium?

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 8P

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