ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $450,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $225,000 and the interest rate on its debt is 6 percent. Both firms expect EBIT to be $51,000. Ignore taxes. Rico owns $22,500 worth of XYZs stock. What rate of return is he expecting?

If the company goes through with the merger, BBAD's financial benefits from the merger likely will be only 50% of the earlier projections, resulting in at least $5 Million lost opportunity. Having spent a great deal of money on R& D and legal already, management is fairly certain BBAD ownership (the members of the LLC) will sue the company's Directors and Officers as well as BBAD itself for a wrongful act resulting in injury to the owners. Legal estimates a $1.5 Million settlement in favor of the owner-members would result.

If the company does not go through with the merger, BBAD's sunk cost of $1 Million R&D plus $200,000 in merger legal fees and professional advice become a huge loss for the company rather than an investment. BBAD management is fairly certain BBAD ownership (the members of the LLC) will sue the company's Directors and Officers as well as BBAD itself for a wrongful act resulting in injury to the owners. Legal estimates a $1 Million settlement in favor of the owner-members would result.

Without trying to determine what BBAD should do about the merger, briefly discuss just the insurance implications of these two alternatives.

i) If BBAD goes through with the merger and what management fears does indeed happen -- members of the BBAD LLC sue the company's Ds and Os as well as BBAD itself for a wrongful act resulting in injury to the owners, resulting in a $1.5 Million settlement in favor of the owner-members.

ii) If BBAD does not go through with the merger and what management fears does indeed happen -- members of the BBAD LLC sue the company's Ds and Os as well as BBAD itself for a wrongful act resulting in injury to the owners, resulting in a $1 Million settlement in favor of the owner-members:

Now suppose that BBAD's Board of Directors and management decide on a third alternative -- BBAD acquires the distillery (in early 2020). With the purchase behind them, BBAD management take over strategic management of the distillery, but leave the day-to-day operations temporarily in the hands of the distillery's long-time three-person management team. Six months after the acquisition, BBAD fires all three top operational managers (all of whom have become BBAD officers as a result of the acquisition agreement), each of whom is over the age of 50. While BBAD argues lack of trust is the justification for firing the three, each of the three fired officers alleges age discrimination, files a complaint with the EEOC and a lawsuit against BBAD for $2 Million (each). What are the insurance implications of:

iii) Settling the three lawsuits for $1.5 Million total, with minimal defense costs of $30,000

iv) Winning the three lawsuits, but incurring defense costs of $250,000