Solution of Case Study

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Probability of worker injury = 1/5

Losses from a Building & Plant:

Repair Expenses = 1,000,000
Lost accure due to damage Machinery & Equipment = 4,500,000
Total = 55, 00,000
Expected loss = 55, 00,000 x 1/5
= 11, 00,000

Option-1

Expected loss = 11, 00,000

Cost of residual uncertainty = 5, 00,000
Cost of loss control = 0
Cost of loss financing = 0
Cost of internal risk reduction = 0________
Total Cost of risk = 16, 00,000

Firm Value = 120,000,000 – 16, 00, 000

= 11, 84, 00,000

Option-II

Cost of Risk:
Expected Loss = 550,000
Cost of Residual Uncertainty = 250,000
Cost of loss control = 90,000
Cost of loss financing = 0
Cost of internal risk reduction = 0________
Total Cost of risk = 8,90,000

Firm Value = 120,000,000 – 8, 90,000

= 11, 91, 10,000
Option-III

Cost of Risk:
Expected Loss = 2,75,000
Cost of Residual Uncertainty = 1,25,000
Cost of loss control (80,000+90,000) = 1,70,000
Cost of loss financing = 0
Cost of internal risk reduction = 0______
Total Cost of risk = 5,70,000

Firm Value = 120,000,000 – 5, 70,000

= 11, 94, 30,000

Option-IV

Premium = 550,000
Loading = Premium - Expected Losses
= 550,000 - 1100,000
= (550,000)
Cost of Risk:
Expected Loss = 1100,000
Cost of Residual Uncertainty = 0
Cost of loss control = 0
Cost of loss financing = (550,000)
Cost of internal risk reduction = 0______
Total Cost of risk = 550,000

Firm Value = 120,000,000 –550,000

= 11, 94, 50,000
 Assignment # 1
Financial Risk Management
Submitted To:
Tahseen Mohsin

Submitted By:
Adnan Sajid 100645-011
Aamir Saleem Rana 100645-007
Muhammad Rizwan Virk 100645-010
Muhammad Waqar Akram 100645-017

Programme:
M.com (3rd Semester)
(Batch-6)

Institute of Audit & Accountancy

University of Management & Technology.