Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Q4) Pear-tree Ltd. is valued at 13 millions and currently earns a 15% return on capital. Annual losses from pure risks at Peartree are usually

image text in transcribed

image text in transcribed
Q4) Pear-tree Ltd. is valued at 13 millions and currently earns a 15% return on capital. Annual losses from pure risks at Peartree are usually around 180,000. For the forthcoming year, Peartree's insurers have quoted an insurance premium of T00,000 to cover all losses. REQUIRED: (making any necessary assumptions and showing all workings) a} Calculate Peartree's opportunity cost of insurance (8 marks) a} Calculate the opportunity cost if management at Peartree set up a 2,400,000 fund to cover potential losses. The fund would be invested at a risk free 5% rate of interest and cost 300,000 to administer. (12 marks) ciBased on the information and your calculations so far for this question, offer your opinions on whether the managers at Peartree should choose the full insurance (as in a)) or the fund (as in 13)). (6 marks) :1} Explain what information OTHER than that provided is relevant to the situation and how it might inuence the decision to insure or self-insure. (12 marks) e} Suggest and explain details of alternative ways that Peartree's pure loss exposure could be handled that might be more sensible than either full insurance or full self-insurance (12 marks)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Survey Of Economics

Authors: Irvin B. Tucker

10th Edition

133711152X, 978-1337111522

More Books

Students also viewed these Economics questions

Question

3. What is my goal?

Answered: 1 week ago

Question

2. I try to be as logical as possible

Answered: 1 week ago