Koolclean plc was founded several years ago by the inventor of an innovativeconsumer product. The product has been very successful in the UK and the inventorhas decided to seek a quote on the Alternative Investment Market (AIM). At present

60% of Koolclean plc's shares are held by the inventor and the remaining 40% areheld by a venture capitalist who is keen for the company to list in this way so that hisblock of shares can be sold.

The company has been managed by the inventor herself, assisted by a part-timedirector appointed by the venture capitalist. The part-time director will step downwhen the venture capitalist's block of shares is sold.

The inventor is keen to appoint an experienced management team and has decided tooffer a remuneration package that comprises a fairly large number of share optionsand a relatively small salary in order to attract a particular type of manager.

Koolclean plc has published audited financial statements every year since it wasincorporated. The inventor has decided to replace the company's audit firm with onethat is larger and more experienced in auditing the financial statements of quotedcompanies.

(i) Explain the advantages and disadvantages of seeking the initial funding for anew business in the form of equity from a venture capitalist rather thanborrowing. [6matks]

(ii) Explain the agency issues that are likely to arise from paying the new directorswith share options rather than salaries. [8marks]

(iii) Describe the external auditor's role in protecting Koolclean plc'sshareholders' interests after it obtains its quotation. [6marks]

[Total 20

A company incurs a liability to pay $1, 000(1 +0.4/) at the end of year t, for z equal to 5, 10, 15, 20 and 25. It values these liabilities assuming that in the future there will be a constant effective interest rate of 7% per annum. An amount equal to the total present value of the liabilities is immediately invested in two stocks: Stock A pays coupons of 5% per annum annually in arrears and is redeemable in 26 years at par. Stock B pays coupons of 4% per annum annually in arrears and is redeemable in 32 years at par. The gross redemption yield on both stocks is the same as that used to value the liabilities. (i) Calculate the present value of the liabilities. [3] (ii) Calculate the discounted mean term of the liabilities. [3] (iii) If the discounted mean term of the assets is the same as the discounted mean term of the liabilities, calculate the nominal amount of each stock which should be purchased. [9] [Total 15]The expected annual effective rate of return from an insurance company's investments is 6% and the standard deviation of annual returns is 8%. The annual effective returns are independent and (1+ i,) is lognormally distributed, where i, is the return in the / th year. (a) Calculate the expected value of an investment of fl million after ten years. (b) Calculate the probability that the accumulation of the investment will be less than 90% of the expected value. [8]