Question
ASSETS Total Current Assets$6,000,000.00 Total Long-term Assets$8,500,000.00 TOTAL ASSETS $14,500,000.00 LIABILITIES: Total Current Liabilities $4,000,000.00 Total Long-term Liabilities$6,500,000.00 TOTAL LIABILITIES $10,500,000.00 TOTAL STOCKHOLDER'S EQUITY $4,000,000.00
ASSETS
Total Current Assets$6,000,000.00
Total Long-term Assets$8,500,000.00
TOTAL ASSETS $14,500,000.00
LIABILITIES:
Total Current Liabilities $4,000,000.00
Total Long-term Liabilities$6,500,000.00
TOTAL LIABILITIES $10,500,000.00
TOTAL STOCKHOLDER'S EQUITY$4,000,000.00
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY$14,500,000.00
Redtrucks is looking to finance damage risk via a risk financing method (for this loss exposure) by forming a captive insurance co.The financial information on the balance sheet will remain stable for the next decade. Redtrucks internal rate of return is 12%.
The start-up costs for the captive insurance company would be $350,000 with yearly premiums of $125,000 for the next 10 years.
Using the present value of future cash flows, what will the cost of a captive be?Be mindful this decision has a 10 year time horizon.Explain.
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Financial Management Theory and Practice
Authors: Eugene F. Brigham, Michael C. Ehrhardt
16th edition
1337902608, 978-1337902601
