Purchase Solution

The purchase of liability insurance policy

Not what you're looking for?

Ask Custom Question

Ambrose Motor Corporation has expected earnings before interest payments for the next year equal to $100 million if it does not lose a product liability lawsuit. Interest and principal payments on its debt equal $60 million, leaving $40 million for shareholders if it does not lose a product liability suit. The probability of losing a product liability suit is 0.02, and the expected damage if a suit is lost equals $50 million. If the suit is lost, the firm will be unable to make its promised payments to debt holders and it will have to renegotiate its debt payments. The legal and administrative costs of negotiations equal $5 million. Should Ambrose Motor purchase a liability insurance polity with a $50 million limit for a premium of $1.2 million? Explain.

Purchase this Solution
Solution Summary

This post discusses about the purchase of liability insurance policy without lose a product liability lawsuit

Solution Preview

Probability of loss = 0.02
Amount at loss = Damage under law suit + admin cost of renegotiating debt payment
=$50 million + $5 million = $55 million
Expected value of loss = $55 ...

Purchase this Solution
Free BrainMass Quizzes
SWOT

This quiz will test your understanding of the SWOT analysis, including terms, concepts, uses, advantages, and process.

Situational Leadership

This quiz will help you better understand Situational Leadership and its theories.

Understanding Management

This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.

Operations Management

This quiz tests a student's knowledge about Operations Management

Cost Concepts: Analyzing Costs in Managerial Accounting

This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.

View More Free Quizzes
Related BrainMass Solutions

  • Liability Insurance, Insurers, Profits

    - What is the firm's before-tax expected profit without insurance? What is its after-tax expected profit without insurance? - Suppose the firm can purchase a liability insurance policy with full coverage for a premium of $11,000.

  • Acme Life Insurance Company liability

    Acme says it has no knowledge of any policy and refuses to pay the proceeds. Under what theory of liability might the insurance company have to pay Joan's heirs? Explain your answer.

  • Bob Brown was recently involved in a minor auto accident

    of the policy.

  • Proper Letter Writing for Contracting

    Also request Professional Liability insurance from MT engineering company. on the insurance policy of MT engineering company, request to include Expo as certificate holder for this project.

  • Automobile Insurance: Liability and Coverage

    of the policy.

  • Health Insurance

    In contrast, occurrence-based insurance: common to certain types of liability insurance (e.g. public liability) and property insurance policies where the trigger for liability is an insured event or occurrence that occurs during the period of the policy

  • Journal Entries and T-accounts for the DeCort Company

    This is the first year of the policy-Transaction was recorded as insurance expense. 2. Dec 1-purchased $400 of supplies for cash. The purchase was recorded as an asset, supplies.

  • Business Insurance

    First, I would have to look at the liability risk involved with the type of business that the company does. This needs to be assessed because the premiums for the insurance could outweigh the actual potential for liability.

  • New Hampshire Rafting Company

    The liability amounts for rafting companies generally provide up to an average of $5 million in coverage per policy. New Hampshire has no specific laws for mobile home insurance requirements.

View More Related Solutions