CAS Exam 7 Spring 2017, Question 19
Study guide: Exam 7
Given the following financial information for an insurer as of December 31, 2016:
| Dividend payout ratio: | 75.0% |
| Expected equity market risk premium: | 5.0% |
| Risk-free rate: | 2.3% |
| Insurer's equity beta: | 1.10 |
| Calendar Year Projections ($000) | 2017 | 2018 | 2019 |
|---|---|---|---|
| GAAP equity (beginning of period) | 100,000 | ||
| Net income | 20,000 | 22,500 | 25,000 |
Part a (0.25 points)
Calculate the insurer's risk-adjusted discount rate using the Capital Asset Pricing Model.
Part b (1.75 points)
Calculate the value of this insurer as of December 31, 2016, using the dividend discount model.
Part c (1.25 points)
Calculate the value of this insurer as of December 31, 2016, using the abnormal earnings model, assuming forecast horizon abnormal earnings are constant after the projected periods.
Part d (0.5 points)
Explain the difference in the insurer's calculated value between the dividend discount model and the abnormal earnings method.
No current syllabus covers this question; it is kept for the record.
Answer this question and see the worked solution