# Question: genentechs main facility is located in south san francisco suppose...

###### Question details

Genentech's main facility is located in South San Francisco. Suppose that Genentech would experience a direct loss of

$ 300 million in the event of a major earthquake disrupting its operations. The chance of such an earthquake is 2.5% per year, with a beta of −0.25.

**a.** If the risk-free interest rate is 5.5%,
and the expected return of the market is 11.5%,

what is the actuarially fair insurance premium to cover
Genentech's loss?**b.** Suppose the insurance company
raises the premium by an additional 18%

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?

**a.** If the risk-free interest rate is 5.5%,
and the expected return of the market is 11.5%,

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 18% 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.)