Use the Following Information to Answer the Question(s) Below

question 45

Multiple Choice

Use the following information to answer the question(s) below.

Rearden Metal imports ore from South America. Assume that it is 2016 and Rearden Metal is worried that the South American mines may enter into a long-term contract with the Chinese to sell all of their ore output to China, hence cutting off Rearden Metal's supply. In the event of such a contract with the Chinese, Rearden Metal 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 35% down to 10%. An insurance firm has agreed to write a trade insurance policy that will pay Rearden Metal $2,500,000 in the event of the South American supply of ore being cut off. The chance of the South American supply being cut off is estimated to be 20%, with a beta of -2.0. The risk-free rate of interest is 4% and the return on the market is estimated to be 12%.

-The actuarially fair premium for this insurance policy is closest to:

• A)$417,000.
• B)$446,000.
• C)$500,000.
• D)$568,000.

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Definitions:

Research and Development

The part of a business activity that is concerned with acquiring new knowledge and using it to develop new products, processes, or services or to improve existing ones.

Technological Application

The use or implementation of technology for practical purposes, especially in industry or commerce.

Research and Development Spending

Financial investments in the innovation, improvement, and development of new products, services, or technologies.

Government Proportion

This term is not standard and may refer to the ratio or percentage of government spending or representation in relation to something specific, such as GDP or population, but without more context, a precise definition cannot be provided.