Actuarially fair insurance premium to cover genentech loss

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Reference no: EM131566433

Genentech's main facility is located in South San Francisco. Suppose that Genentech would experience a direct loss of $550 million in the event of a major earthquake disrupting its operations. The chance of such an earthquake is 1.0% per year, with a beta of −0.50.

a. If the risk-free interest rate is 5.0%, and the expected return of the market is 10.5%, what is the actuarially fair insurance premium to cover Genentech's loss?

The actuarially fair insurance premium to cover Genentech's loss is $____million. (Round to two decimal places)

b. Suppose the insurance company raises the premium by an additional 15% over the amount calculated in part (a) to cover its administrative and overhead costs. What amount of financial distress or issuance costs would Genentech have to suffer if it were not insured to justify purchasing the insurance?

The amount of financial distress or issuance costs is $_____ million. (Round to two decimal places)

Reference no: EM131566433

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