Chapter 2 DQ - Chapter 2 Discussion Questions 1. What is...

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Chapter 2 Discussion Questions 1. What is the objective of risk management, and is it consistent with maximization of firm value? 1. Minimize the cost of the risk 1. cost of paying expected loss 2. cost of residual uncertainty: how much uncertainty after methods have been implemented 3. cost of risk management methods 2. value of firm (w/risk) = value of firm (w/o risk) – cost of risk Cost of risk: exp loss, cost of rm, cost of r.u. 2. The value of a firm in an ideal world of no risk is $100,000. But, in the real world, the firm faces the risk of an injury to one of its workers, where the probability of injury is 10 percent and the resulting losses would be $60,000. The firm is considering four options for dealing with risk: Option 1: Do nothing & pay expected losses out of the firm's own resources. The cost of residual uncertainty is $4,000. Option 2: Invest $2,000 in loss control that would reduce the chance of loss to 5% & reduce the cost of residual uncertainty to $3,000. Option 3: Invest $4,000 in loss control that would reduce the chance of loss to 2.5% &
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This note was uploaded on 02/18/2012 for the course FINC 3134 taught by Professor Dr.eastman during the Spring '12 term at Georgia Southern University .

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Chapter 2 DQ - Chapter 2 Discussion Questions 1. What is...

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