EBK CORPORATE FINANCE
4th Edition
ISBN: 9780134202778
Author: DeMarzo
Publisher: PEARSON CUSTOM PUB.(CONSIGNMENT)
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Chapter 30, Problem 4P
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)?
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Chapter 30 Solutions
EBK CORPORATE FINANCE
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