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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:

Overdue

A status indicating that a payment, task, or obligation has not been fulfilled by the designated or expected deadline.

HDC Status

Holder in Due Course Status; a term in negotiable instruments law referring to a person who has acquired a negotiable instrument in good faith for value, and thus has certain protections.

Negotiable Instrument

A written promise or order to pay a specific amount of money, easily transferable from one party to another.

Face Value

The nominal or original value stated on a financial instrument, such as a bond or currency bill, not necessarily its current market value.