1. (a) A companys directors have decided to provide senior managers with a performance bonus scheme. The bonus scheme entitles the managers to a cash payment of K250,000 should the company share price have increased by more than 20% at the end of the next 6 months. In addition, the managers will be entitled to 5,000 free shares each, should the share price have increased by more than 10% at the end of

the next 6 months. You are given the following data: Current share price	K78.10
Continuously-compounded risk-free rate	5% pa
Share price volatility	25% pa

No dividends to be paid over the next 6 months. (i) Explain three disadvantages of this bonus scheme as an incentive for managers to perform. (3) (ii) Some shareholders are concerned that this scheme might cause an undesirable distortion to the managers behaviour. Suggest three modifications to the scheme that will ensure that the managers aims coincide with the long-term objectives of the shareholders. (3) (b) Dr Musonda is struggling to repay his loan of K600,000 with payments of K12,800 made monthly in arrears for 5 years. After exactly one year, a loan company offers to \help" Dr Musonda by restructuring his loan with new monthly payments of K9,000 made in arrears. (i) Assuming the company charges the same APR as Dr Musondas original loan, calculate the term of the new loan. (7) (ii) Calculate how much more interest in total Dr Musonda will pay on his restructured loan than on his original loan. (3