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:

Long-range Plans

are strategic plans that outline an organization's goals, strategies, and actions for a period typically extending beyond five years.

Top-level Managers

Senior executives within an organization who are responsible for making long-term strategic decisions and ensuring the overall success and direction of the company.

Organization's Performance

A measure of how effectively and efficiently an organization achieves its objectives and fulfills its mission, often evaluated through metrics like profitability, productivity, and quality.

Objectives

Specific, measurable goals that a person or organization aims to achieve within a certain timeframe.