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

question 33

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%.

-Rearden's NPV for purchasing this policy is closest to:

Definitions:

Gender

A social construct regarding the roles, behaviors, activities, and attributes that a given society considers appropriate for men and women.

Distinctiveness

The quality of being markedly different or unique in comparison to others.

Delay of Gratification

Delay of gratification denotes the ability to resist the temptation for an immediate reward and wait for a later, often greater reward.

High-calorie Dessert

Sweet dishes that are particularly rich in calories, often made with sugar, fats, and other energy-dense ingredients.