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?
Hi 1.the cost of bonus is the additional reserve the insurer has to hold as a result of declaring a bonus to policyholders. In an 80:20 profit share between phs and shs, shs are entitled to 20 of every 80 declared to phs or 20/80 = 25%. 2. Yes although the cost of bonus would be determined on the statutory valuation basis
