Mel Is Thinking of Going on a Cruise

question 112

Multiple Choice

Mel is thinking of going on a cruise.Mel values a cruise in nice weather at $2,000 and values a cruise in bad weather at $50.According to a very reliable source,the probability of nice weather is 60% and the probability of bad weather is 40%.Trip insurance is sometimes available.If purchased,it allows travelers to delay the cruise until the weather is nice.
Suppose that the price of the cruise is $1200.If Mel is not risk averse,Mel should buy trip insurance

• A)never.
• B)only if it costs less than $780.
• C)only if it costs less than $20.
• D)only if it costs less than $50

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Definitions:

After-Tax Cost of Debt

The net cost of debt after taking into account the tax deductions available on interest payments.

Yield-to-Maturity

The total return expected on a bond if held until its maturity date, accounting for its current market price, face value, interest rate, and time to maturity.

Marginal Tax Rate

A rephrasing: The portion of tax applied to your income for each additional dollar you earn.

Required Rate of Return

The minimum annual percentage return an investor expects to earn from an investment, considering its risk level.