In April 2001, Paper 2 Question 1 (iii) asks to describe how would you calculate EV of a company called CoC. CoC has been put up for sale and it is an overseas subsidiary of another UK company. CoC sells with and without profits business and all surpluses are distributed in the ratio 80:20.
In the examiners' report it is written in the solution 'The shareholder's share of profit is 25% of the cost of bonus. Net down for taxation on shareholder profits'. I do not understand:
(a) why the shareholder's share of profit would be 25% of the cost of bonus?
(b) What is cost of bonus? Is it the discounted present value of future expected bonuses?
In the examiners' report it is written in the solution 'The shareholder's share of profit is 25% of the cost of bonus. Net down for taxation on shareholder profits'. I do not understand:
(a) why the shareholder's share of profit would be 25% of the cost of bonus?
(b) What is cost of bonus? Is it the discounted present value of future expected bonuses?