Finance
FIN 330 – Homework Chapters 15 and 17
Chapter 15: Multirisk Management Contracts III: Business
1. The building where Alpha Mortgage Company’s office was located received minor smoke damage, forcing the company to relocate its operations for one month. Assuming standard BIC coverage and the following hypothetical conditions, what amount of benefits could the company expect to receive?
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Preloss Financial Information |
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Average monthly revenues |
$220,000 |
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Average monthly payroll |
$100,000 |
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Monthly heat, electricity, water |
$25,000 |
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Monthly rent for leased office |
$25,000 |
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Monthly interest expense |
$10,000 |
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Monthly marketing expense |
$5,000 |
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Monthly other expenses |
$5,000 |
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Postloss Financial Information for One Month |
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Revenues |
$170,000 |
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Payroll |
$100,000 |
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Utilities |
$30,000 |
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Rent on leased office |
$0 |
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Rent for temporary space |
$50,000 |
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Interest expense |
$0 |
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Marketing expense |
$6,000 |
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Other expenses |
$12,000 |
Answer:
According to Preloss Financial Information;
Net Income = __________
According to Postloss Financial Information;
Net Loss = ______________
The total loss equals __________, the sum of income not received _____________that would have been expected without a loss, plus the actual lost income ___________ incurred.
The amount of benefit that the company would expect to revive is ________
2. Steinman also bought a BIC with a limit of $250,000 and a 50 percent coinsurance clause. No other endorsements are used. A limited income statement for last year is shown below.
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Revenues |
$2,000,000 |
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Less: |
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Cost of goods sold |
$800,000 |
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Utilities |
$200,000 |
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Payroll |
$400,000 |
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Other expenses |
$300,000 |
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$1,700,000 |
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Profit |
$300,000 |
a. How much in expenses does Steinman expect to be noncontinuing in the event of a shutdown? Explain.
Answer:
The limit of insurance ought to equal the expected lost profits plus continuing expenses. Assuming no peak period, with a limit of _________ and a ______ coinsurance clause, Steinman is indicating that on an annualized basis, it expects to lose its ___________ in profits plus enough expenses to equal ____________ (the limit of ____________ for a whole year instead of half a year). The expected continuing expenses, therefore, equals ____________on an annualized basis, or _____________ for the six month expected shut-down period.
b. What is the longest shutdown period Steinman would expect following a loss?
Answer:
Steinman expects no more than a __-month shutdown, evidenced by the ____ coinsurance clause. Again, the assumption is that business is stable over the year.
c. If a three-month closing occurred following the roof collapsing due to the weight of snow, what do you think would be the loss? Explain.
Answer:
For a three-month shut-down, if Steinman's estimates are correct, we would expect a loss of _______________, which is half of what he expected for a six-month shut-down.
Chapter 17 – Life Cycle Financial Risks
1. Using the PV method, what is the economic value of a forty-year-old man who earns an average annual income of $130,000 for his lifetime at an interest rate of 3 percent?
Answer:
The Present value of an annuity of $_____________ at the end of the year for ____ years is: _______________________
2. Mary Koonce describes herself as an optimist who does not wish to dwell on the unpleasant what-ifs in life. She is urged by her financial planner to perform a family needs analysis to insure against the risk of premature death. Mary insists this is unnecessary because she already made such an assessment ten years ago and has a life insurance policy guaranteeing a $250,000 death benefit. Mary is divorced, has two teenage sons and a seven-year-old daughter, and purchased her first home a year ago. Do you agree with Mary’s judgment regarding her needs analysis? If you were her financial advisor, what would you tell her?
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Income replacement |
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Additional housing costs |
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End-of-life expenses |
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Debt |
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College funds |
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Total life insurance needs |
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