SOA CFE SDMCorporate Finance & ERM — Strategic Decision Making

Equity 600 (market), debt 400 (market), $r_E$ = 10%, $r_D$ = 5%, tax 25%. WACC is:

A project pays 100 if a regulation passes (p = 0.4) and −30 otherwise; the alternative pays 20 for certain. The expected value of perfect information is:

Business unit A earns 60 on economic capital 500; unit B earns 30 on 200; hurdle 12%. Which creates value?

Under IFRS 17 the contractual service margin (CSM):

The case company is considering acquiring a specialty insurer for 1.2bn (book value 900m). Projected synergies are 40m pre-tax per year growing 2%; tax 25%; WACC 8%. (a) Value the synergies. (b) Assess whether the premium over book is justified. (c) Identify three integration and financing risks and how to mitigate them.

The board wants to grow the company's variable annuity sales by 50% over three years. Using economic capital and risk appetite concepts, evaluate the proposal and recommend conditions under which you would support it.

Describe how you would use scenario planning to set the company's five-year strategy given uncertainty about interest rates and regulatory change. Include how you would build the scenarios, test strategic options against them, and present the results to the board.

A company is financed 60% equity (cost of equity 10%) and 40% debt (pre-tax cost of debt 5%), with a 30% tax rate. Calculate the weighted average cost of capital (WACC).

An insurer is evaluating entering a new product line with an expected NPV of +20 million but a standalone economic capital requirement that would increase group risk-based capital needs and reduce group RAROC. Discuss the strategic ERM considerations beyond the standalone NPV.