(c) Critically discuss FOUR principal roles of non-executive directors and explain the potential tensions between
these roles that WM’s non-executive directors may experience in advising on the disclosure of the
overestimation of the mallerite reserve. (12 marks)
第1题:
(c) Explain the benefits of performance-related pay in rewarding directors and critically evaluate the implications
of the package offered to Choo Wang. (8 marks)
第2题:
2 Chen Products produces four manufactured products: Products 1, 2, 3 and 4. The company’s risk committee recently
met to discuss how the company might respond to a number of problems that have arisen with Product 2. After a
number of incidents in which Product 2 had failed whilst being used by customers, Chen Products had been presented
with compensation claims from customers injured and inconvenienced by the product failure. It was decided that the
risk committee should meet to discuss the options.
When the discussion of Product 2 began, committee chairman Anne Ricardo reminded her colleagues that, apart from
the compensation claims, Product 2 was a highly profitable product.
Chen’s risk management committee comprised four non-executive directors who each had different backgrounds and
areas of expertise. None of them had direct experience of Chen’s industry or products. It was noted that it was
common for them to disagree among themselves as to how risks should be managed and that in some situations,
each member proposed a quite different strategy to manage a given risk. This was the case when they discussed
which risk management strategy to adopt with regard to Product 2.
Required:
(a) Describe the typical roles of a risk management committee. (6 marks)
第3题:
(ii) Explain the ethical tensions between these roles that Anne is now experiencing. (4 marks)
第4题:
(b) Identify and explain THREE approaches that the directors of Moffat Ltd might apply in assessing the
QUALITATIVE benefits of the proposed investment in a new IT system. (6 marks)
第5题:
(b) Explain how growth may be assessed, and critically discuss the advantages and issues that might arise as a
result of a decision by the directors of CSG to pursue the objective of growth. (8 marks)
第6题:
(b) Explain FIVE critical success factors to the performance of HSC on which the directors must focus if HSC is
to achieve success in its marketplace. (10 marks)
第7题:
(c) Identify and discuss the implications for the audit report if:
(i) the directors refuse to disclose the note; (4 marks)
第8题:
Moonstar Co is a property development company which is planning to undertake a $200 million commercial property development. Moonstar Co has had some difficulties over the last few years, with some developments not generating the expected returns and the company has at times struggled to pay its finance costs. As a result Moonstar Co’s credit rating has been lowered, affecting the terms it can obtain for bank finance. Although Moonstar Co is listed on its local stock exchange, 75% of the share capital is held by members of the family who founded the company. The family members who are shareholders do not wish to subscribe for a rights issue and are unwilling to dilute their control over the company by authorising a new issue of equity shares. Moonstar Co’s board is therefore considering other methods of financing the development, which the directors believe will generate higher returns than other recent investments, as the country where Moonstar Co is based appears to be emerging from recession.
Securitisation proposals
One of the non-executive directors of Moonstar Co has proposed that it should raise funds by means of a securitisation process, transferring the rights to the rental income from the commercial property development to a special purpose vehicle. Her proposals assume that the leases will generate an income of 11% per annum to Moonstar Co over a ten-year period. She proposes that Moonstar Co should use 90% of the value of the investment for a collateralised loan obligation which should be structured as follows:
– 60% of the collateral value to support a tranche of A-rated floating rate loan notes offering investors LIBOR plus 150 basis points
– 15% of the collateral value to support a tranche of B-rated fixed rate loan notes offering investors 12%
– 15% of the collateral value to support a tranche of C-rated fixed rate loan notes offering investors 13%
– 10% of the collateral value to support a tranche as subordinated certificates, with the return being the excess of receipts over payments from the securitisation process
The non-executive director believes that there will be sufficient demand for all tranches of the loan notes from investors. Investors will expect that the income stream from the development to be low risk, as they will expect the property market to improve with the recession coming to an end and enough potential lessees to be attracted by the new development.
The non-executive director predicts that there would be annual costs of $200,000 in administering the loan. She acknowledges that there would be interest rate risks associated with the proposal, and proposes a fixed for variable interest rate swap on the A-rated floating rate notes, exchanging LIBOR for 9·5%.
However the finance director believes that the prediction of the income from the development that the non-executive director has made is over-optimistic. He believes that it is most likely that the total value of the rental income will be 5% lower than the non-executive director has forecast. He believes that there is some risk that the returns could be so low as to jeopardise the income for the C-rated fixed rate loan note holders.
Islamic finance
Moonstar Co’s chief executive has wondered whether Sukuk finance would be a better way of funding the development than the securitisation.
Moonstar Co’s chairman has pointed out that a major bank in the country where Moonstar Co is located has begun to offer a range of Islamic financial products. The chairman has suggested that a Mudaraba contract would be the most appropriate method of providing the funds required for the investment.
Required:
(a) Calculate the amounts in $ which each of the tranches can expect to receive from the securitisation arrangement proposed by the non-executive director and discuss how the variability in rental income affects the returns from the securitisation. (11 marks)
(b) Discuss the benefits and risks for Moonstar Co associated with the securitisation arrangement that the non-executive director has proposed. (6 marks)
(c) (i) Discuss the suitability of Sukuk finance to fund the investment, including an assessment of its appeal to potential investors. (4 marks)
(ii) Discuss whether a Mudaraba contract would be an appropriate method of financing the investment and discuss why the bank may have concerns about providing finance by this method. (4 marks)
(a) An annual cash flow account compares the estimated cash flows receivable from the property against the liabilities within the securitisation process. The swap introduces leverage into the arrangement.
The holders of the certificates are expected to receive $3·17million on $18 million, giving them a return of 17·6%. If the cash flows are 5% lower than the non-executive director has predicted, annual revenue received will fall to $20·90 million, reducing the balance available for the subordinated certificates to $2·07 million, giving a return of 11·5% on the subordinated certificates, which is below the returns offered on the B and C-rated loan notes. The point at which the holders of the certificates will receive nothing and below which the holders of the C-rated loan notes will not receive their full income will be an annual income of $18·83 million (a return of 9·4%), which is 14·4% less than the income that the non-executive director has forecast.
(b) Benefits
The finance costs of the securitisation may be lower than the finance costs of ordinary loan capital. The cash flows from the commercial property development may be regarded as lower risk than Moonstar Co’s other revenue streams. This will impact upon the rates that Moonstar Co is able to offer borrowers.
The securitisation matches the assets of the future cash flows to the liabilities to loan note holders. The non-executive director is assuming a steady stream of lease income over the next 10 years, with the development probably being close to being fully occupied over that period.
The securitisation means that Moonstar Co is no longer concerned with the risk that the level of earnings from the properties will be insufficient to pay the finance costs. Risks have effectively been transferred to the loan note holders.
Risks
Not all of the tranches may appeal to investors. The risk-return relationship on the subordinated certificates does not look very appealing, with the return quite likely to be below what is received on the C-rated loan notes. Even the C-rated loan note holders may question the relationship between the risk and return if there is continued uncertainty in the property sector.
If Moonstar Co seeks funding from other sources for other developments, transferring out a lower risk income stream means that the residual risks associated with the rest of Moonstar Co’s portfolio will be higher. This may affect the availability and terms of other borrowing.
It appears that the size of the securitisation should be large enough for the costs to be bearable. However Moonstar Co may face unforeseen costs, possibly unexpected management or legal expenses.
(c) (i) Sukuk finance could be appropriate for the securitisation of the leasing portfolio. An asset-backed Sukuk would be the same kind of arrangement as the securitisation, where assets are transferred to a special purpose vehicle and the returns and repayments are directly financed by the income from the assets. The Sukuk holders would bear the risks and returns of the relationship.
The other type of Sukuk would be more like a sale and leaseback of the development. Here the Sukuk holders would be guaranteed a rental, so it would seem less appropriate for Moonstar Co if there is significant uncertainty about the returns from the development.
The main issue with the asset-backed Sukuk finance is whether it would be as appealing as certainly the A-tranche of the securitisation arrangement which the non-executive director has proposed. The safer income that the securitisation offers A-tranche investors may be more appealing to investors than a marginally better return from the Sukuk. There will also be costs involved in establishing and gaining approval for the Sukuk, although these costs may be less than for the securitisation arrangement described above.
(ii) A Mudaraba contract would involve the bank providing capital for Moonstar Co to invest in the development. Moonstar Co would manage the investment which the capital funded. Profits from the investment would be shared with the bank, but losses would be solely borne by the bank. A Mudaraba contract is essentially an equity partnership, so Moonstar Co might not face the threat to its credit rating which it would if it obtained ordinary loan finance for the development. A Mudaraba contract would also represent a diversification of sources of finance. It would not require the commitment to pay interest that loan finance would involve.
Moonstar Co would maintain control over the running of the project. A Mudaraba contract would offer a method of obtaining equity funding without the dilution of control which an issue of shares to external shareholders would bring. This is likely to make it appealing to Moonstar Co’s directors, given their desire to maintain a dominant influence over the business.
The bank would be concerned about the uncertainties regarding the rental income from the development. Although the lack of involvement by the bank might appeal to Moonstar Co's directors, the bank might not find it so attractive. The bank might be concerned about information asymmetry – that Moonstar Co’s management might be reluctant to supply the bank with the information it needs to judge how well its investment is performing.
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第13题:
(b) Assess the benefits of the separation of the roles of chief executive and chairman that Alliya Yongvanich
argued for and explain her belief that ‘accountability to shareholders’ is increased by the separation of these
roles. (12 marks)
第14题:
(c) Risk committee members can be either executive or non-executive.
Required:
(i) Distinguish between executive and non-executive directors. (2 marks)
第15题:
(b) Explain the roles of a nominations committee and assess the potential usefulness of a nominations committee
to the board of Rosh and Company. (8 marks)
第16题:
3 The Chemical Services Group plc (CSG), which operates a divisionalised structure, provides services to industrial and
domestic customers in Swingland, a country whose economic climate is subject to significant variations. There have
been a number of recent changes at board level within CSG and therefore the managing director called a meeting of
the board of directors at which each of four recently appointed directors put forward their view as to what their primary
focus should be. These were as follows:
The research and development director stated that ‘my primary focus is upon ensuring that we continue to develop
the products and services that satisfy the requirements of our existing and potential customers’.
The finance director stated that ‘my primary focus is upon keeping our investors satisfied’.
The human resources director stated that ‘my primary focus is upon ensuring that we take all the steps necessary to
establish and maintain our reputation as a responsible employer’.
The corporate affairs director stated that ‘my primary focus is upon the need to ensure that we are recognised as a
socially responsible organisation’.
Required:
(a) Discuss the criteria that should be considered in deciding upon suitable performance measures in respect of
the primary focus of each of the FOUR directors of CSG providing THREE appropriate quantitative measures
for each primary focus.
Note: your answer may include financial or non-financial quantitative measures. (12 marks)
第17题:
(c) Briefly discuss why the directors of HFL might choose contract D irrespective of whether or not contract D
would have been selected using expected values as per part (a). (2 marks)
第18题:
(b) The Superior Fitness Co (SFC), which is well established in Mayland, operates nine centres. Each of SFC’s
centres is similar in size to those of HFG. SFC also provides dietary plans and fitness programmes to its clients.
The directors of HFG have decided that they wish to benchmark the performance of HFG with that of SFC.
Required:
Discuss the problems that the directors of HFG might experience in their wish to benchmark the performance
of HFG with the performance of SFC, and recommend how such problems might be successfully addressed.
(7 marks)
第19题:
(a) Contrast the role of internal and external auditors. (8 marks)
(b) Conoy Co designs and manufactures luxury motor vehicles. The company employs 2,500 staff and consistently makes a net profit of between 10% and 15% of sales. Conoy Co is not listed; its shares are held by 15 individuals, most of them from the same family. The maximum shareholding is 15% of the share capital.
The executive directors are drawn mainly from the shareholders. There are no non-executive directors because the company legislation in Conoy Co’s jurisdiction does not require any. The executive directors are very successful in running Conoy Co, partly from their training in production and management techniques, and partly from their ‘hands-on’ approach providing motivation to employees.
The board are considering a significant expansion of the company. However, the company’s bankers are
concerned with the standard of financial reporting as the financial director (FD) has recently left Conoy Co. The board are delaying provision of additional financial information until a new FD is appointed.
Conoy Co does have an internal audit department, although the chief internal auditor frequently comments that the board of Conoy Co do not understand his reports or provide sufficient support for his department or the internal control systems within Conoy Co. The board of Conoy Co concur with this view. Anders & Co, the external auditors have also expressed concern in this area and the fact that the internal audit department focuses work on control systems, not financial reporting. Anders & Co are appointed by and report to the board of Conoy Co.
The board of Conoy Co are considering a proposal from the chief internal auditor to establish an audit committee.
The committee would consist of one executive director, the chief internal auditor as well as three new appointees.
One appointee would have a non-executive seat on the board of directors.
Required:
Discuss the benefits to Conoy Co of forming an audit committee. (12 marks)
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