In: Finance
No insurance |
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Outcome |
Probability |
Cash flow before managerial compensation |
Managerial compensation |
Net cash flow to stockholders |
No Lawsuit |
0.90 |
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Lawsuit |
0.10 |
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Expected cash flow |
Insurance |
||||
Outcome |
Probability |
Cash flow before managerial compensation |
Managerial compensation |
Net cash flow to stockholders |
No Lawsuit |
0.90 |
|||
Lawsuit |
0.10 |
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Expected cash flow |
Expected Cash flow if no lawsuit - $1000000
Expected Cash flow if lawsuit - $0
Prob of no Lawsuit - 0.90
Prob of Lawsuit - 0.10
Mangerial compensation if cetainity = $100000
Mangerial compensation if no cetainity = $125000
Premium for liability insurance coverage - $30000
Expected claim cost =
Premium Loading = $30000
What is his expected compensation ? | |||
Remuneration | Prob | Expected payoff | |
125000 | 0.1 | 12500 | |
100000 | 0.9 | 90000 | |
102500 | |||
No insurance | ||||
Outcome | Probability | Cash flow before managerial compensation | Managerial compensation | Net cash flow to stockholders |
No Lawsuit | 0.9 | $ 10,00,000.00 | $ 1,00,000.00 | $ 8,00,000 |
Lawsuit | 0.1 | $ - | $ 1,25,000.00 | $ -1,25,000 |
Expected cash flow | $ 6,75,000 |
Insurance | ||||
Outcome | Probability | Cash flow before managerial compensation | Managerial compensation | Net cash flow to stockholders |
No Lawsuit | 0.9 | $ 10,00,000.00 | $ 1,00,000.00 | $ 8,00,000 |
Lawsuit | 0.1 | $ - | $ 1,25,000.00 | $ -1,25,000 |
Claim | 0.1 | $ 40,000 | ||
Less Insurance Cost | $ -30,000 | |||
Expected cash flow | $ 6,85,000 |