Essay About Cost Of Capital And 5,115,840,000State

Risk Management
Dung NguyenUCID: M12382181HOMEWORK 2Question 1:i. StateCash FlowProbabilityCF*ProbDeviationSqr. DevSqr. Dev * ProbNo Loss$3,000,0000.96$2,880,000$73,000$5,329,000,000$5,115,840,000State 1$1,500,0000.026$39,000-$1,427,000$2,036,329,000,000$52,944,554,000State 2$800,0000.01$8,000-$2,127,000$4,524,129,000,000$45,241,290,000State 3$00.004$0-$2,927,000$8,567,329,000,000$34,269,316,000  Expected value$2,927,000 Variance$137,571,000,000     SD$370,905.65ii. StateCash FlowProbabilityNo Loss3000000 – P0.96State 13000000 – P0.026State 23000000 – P0.01State 33000000 – P0.004iii. StateInsurers costProbabilityNo Loss$00.96State 1$1,500,0000.026State 2$2,200,0000.01State 3$3,000,0000.004iv. StateCash FlowLoss distributionProbabilityLoss*ProbNo Loss$3,000,00000.960State 1$1,500,000$1,500,0000.02639,000State 2$800,000$2,200,0000.0122,000State 3$0$3,000,0000.00412,000   E(Loss)$73,000   Price$100,000    Loading$27,000 v. StateCash FlowProbabilityNo Loss$2,900,0000.96State 1$2,900,0000.026State 2$2,900,0000.01State 3$2,900,0000.004Expected CF= $2,900,000, SD= 0Question 2The cost of capital = 8% => r= 0.08Price of the Skipper Inc’s stock= [pic 1]Question 3:a/  Year 1Year 2ProbRevenue100100 Cost w/o injured79790.9Cost if injured85850.1E (cost)8080 ECF2020 b/ Price of the Skipper Inc’s stock= [pic 2]c/ The risk of work injury is firm- specific risk, while the cost of capital depends on the systematic risk so that the cost of capital should not change because of the injury risk. Question 4: Year 1Year 2Revenue100.000100.000Cost79.44579.445Premium0.5550.555CF20.00020.000Stock Price18.51917.147Sum 35.665