Genentech's main facility is located in South San Francisco. Suppose that Genentech would experience a direct loss of $550 million in the event of a major earthquake disrupting its operations. The chance of such an earthquake is 2.0 % per? year, with a beta of negative 0.40.
a. If the? risk-free interest rate is 6.0 %?, and the expected return of the market is 10.5 %?, what is the actuarially fair insurance premium to cover? Genentech's loss?
The actuarially fair insurance premium to cover? Genentech's loss is ?$ _________________ million. ? (Round to two decimal? places.)
b. Suppose the insurance company raises the premium by an additional 8 % 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.)