hw-9 - 1 Tax Rate = 50 RM Option Retention Loss...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
1. Tax Rate = 50% RM Option Loss No Loss Retention $400,000 [400,000*(1-.5)]=200,000 (200,000) $0 [0*(1-.5)]=0 (0)
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Full Insurance $15,000 [15,000*(1-.5)]=7,500 (7,500) $15,000 [15,000*(1-.5)]=7,500 (7,500) 2. Risk Manager wants to minimize Expected Costs (EC) a. Retention $ Loss of Outcome P[Outcome ] Expected Cost $0 97% $0 $200,000 3% $6,000 $6,000 Full Insurance $ Loss of Outcome P[Outcome ] Expected Cost $7,500 97% $7,275 $7,500 3% $225 $7,500 b. Choose Retention, EC R < EC FI 3. Retain the Exposure to losses, failure to identify exposures to loss or underestimates the loss exposure. 4. The new decision rule is to choose the risk management alternative that minimizes the total cost. 5. Retention= $6,000 + $3,500 = $9,500 Full Insurance= $7,500 + $0 = $7,500 The manager should choose Full Insurance because it has a lower total cost than Retention, Management is less uneasy with Full Insurance because minimizes the expected loss and worry value. With Full Insurance the worry value is always zero since there is no risk with Full Insurance. 6. WV=Pmax – EL. $8,500 - $7,500 = $1,000. The Risk Manager’s Worry Value is $1,000.
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern