CAS Exam 7 Spring 2013, Question 11
Study guide: Exam 7
Given the following information for an insurance company ($000,000):
| Calendar Year 2013 | Calendar Year 2014 | Calendar Year 2015 | |
|---|---|---|---|
| Beginning US GAAP equity | 100 | ||
| Net income | 15 | 16 | 17 |
| Minimum capital needed at year-end to maintain current rating | 110 | 120 | 130 |
- Risk-free rate: 2.0%
- Expected market return for peer companies: 10.0%
- Insurance company's equity beta: 1.25
- CAPM is an appropriate model for determining the company's risk-adjusted discount rate.
- The company plans to maintain its current rating by meeting the minimum capital requirements.
Part a (3 points)
Determine the value of the insurance company as of January 1, 2013 based on the free cash flow to equity method.
Part b (0.5 points)
Explain why the free cash flow to equity method is preferable to the free cash flow to the firm method for valuing a property and casualty insurer.
No current syllabus covers this question; it is kept for the record.
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