CAS Exam 7 Spring 2016, Question 19
Study guide: Exam 7
Given the following financial projections for an insurer as of December 31, 2016 ($000,000):
| Item | Calendar Year 2017 | Calendar Year 2018 | Calendar Year 2019 |
|---|---|---|---|
| Beginning US GAAP equity | 1,000 | xxx | xxx |
| Projected Net Income | 80 | 100 | 140 |
| Minimum Capital to maintain AA Rating at year end | 1,015 | 1,035 | 1,040 |
| Minimum Capital required by governing regulator at year end | 813 | 840 | 875 |
| Minimum Capital to meet management's growth target at year end | 1,017 | 1,015 | 1,035 |
| Change in loss and expense reserves | 100 | -75 | 25 |
| Net borrowing | 12 | 0 | 15 |
- Risk-free rate: 2.0%
- Expected equity market risk premium: 6.0%
- Insurance company equity beta: 1.25
Part a (0.5 points)
Determine the required equity return percentage based on the Capital Asset Pricing Model (CAPM).
Part b (2.5 points)
Determine the value of this company as of January 1, 2017 based on the Free Cash Flow to Equity (FCFE) method.
No current syllabus covers this question; it is kept for the record.
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