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Exesses is a family-owned company that is in the process of recovering from a major corporate scandal. Exesses is a substantial business that is not quoted. None of its shareholders owns more than 5% of the equity shares. None of the shareholders is able to take an active role in the company's management. Exesses' directors were all forced to step down because of the discovery that the directors had been overstating reported profits, which had the effect of inflating their profit-related bonuses. The directors also provided themselves with lavish lifestyles at the company's expense. For example, the company provided chauffeur-driven limousines to transport the directors on both business and personal travel. The entire board of Exesses has resigned. The shareholders have met and have appointed a new chairman and a chief executive. Neither of these appointees have had anything to do with Exesses in the past. They have both agreed that their first priority is to appoint a new board and to structure the management arrangements so that the shareholders' confidence is restored. The chairman has suggested that the new board should be structured as follows: The chairman will work on a part-time basis and will be responsible for the management of the board, including chairing board meetings. The chairman will be paid a fixed annual salary that offers an appropriate rate for the time that he is expected to commit to the company. The chief executive will be employed on a full-time basis to manage the company itself and will receive both a substantial salary and a profit-related bonus. . Four additional full-time directors will be appointed to take charge of particular areas such as marketing and finance. Each will receive a similar package to the chief executive. Two part-time directors will be appointed to participate in board meetings and to review corporate strategy. They will be paid a fixed salary. . The chief executive and each of the full-time directors will receive a 5% shareholding after satisfactorily completing three years on Exesses' board. The chairman and the two part-time directors will appoint a new external audit firm. They will negotiate a contract with a much larger firm than the outgoing auditor and will pay a larger fee for the new auditor's services. (i) Discuss the suitability of the proposals for the appointment and remuneration of the new board of directors from the perspective of maintaining shareholder confidence. [12] (ii) Discuss the implications of appointing a larger and more expensive external audit firm to replace the present auditor. [8] [Total 20](1) Calculate the combined present value of an immediate annuity payable monthly in arrears such that payments are f1,000 pa for the first 6 years and $400 pa for the next 4 years, together with a lump sum of $2,000 at the end of the 10 years. [3] (ii) Calculate the amount of the level annuity payable continuously for 10 years having the same present value as the payments in (i). [3] (iii) Calculate the accumulated values of the first 7 years' payments at the end of the 7th year for the payments in (i) and (ii). [3]An insurance company has liabilities of E10 million due in 10 years time and $20 million due in 15 years time, and assets consisting of two zero-coupon bonds, one paying $7.404 million in 2 years time and the other paying $31.834 million in 25 years time. The current interest rate is 7% per annum effective. (i) Show that Redington's first two conditions for immunisation against small changes in the rate of interest are satisfied for this insurance company. [5] (ii) Determine the profit or loss, expressed as a present value, that the insurance company will make if the interest rate increases immediately to 7.5% per annum effective. [2] (iii) Explain how you might have anticipated, before making the calculation in (ii), whether the result would be a profit or loss. [2] [Total 9]
