Explain the theoretical impact on the risk discount rate, Financial Accounting

Assignment Help:

Question:

A proprietary life company issues only non-profit guaranteed growth bonds. The company invests only in equities with an expected return of 10% p.a, the risk free rate being 5% p.a. At the balance sheet date there were £100m of equities and growth bonds with a maturity value of £80m, the bonds all maturing in exactly one year's time.

(i) Assuming that the possibility of default by the insurance company may be ignored, calculate, using the result of Modigliani Miller for the cost of equity capital or otherwise, the appropriate risk discount rate to value the shareholder s interest in the portfolio of growth bonds

(ii) Explain the theoretical impact on the risk discount rate of allowing for the default of part or all of policyholder benefits.

(iii) (a) Describe what is meant by franchise value in the context of a life company.

(b) Explain in general terms how the franchise value varies with the amount of capital on the life company balance sheet.


Related Discussions:- Explain the theoretical impact on the risk discount rate

Example of annuity, Assume Mr. Ram deposits Rs. 10,000 annually in a bank f...

Assume Mr. Ram deposits Rs. 10,000 annually in a bank for 5 years, at 10 percent compound interest rate. Compute the value of this series of deposits on the end of five years by as

Recording and reporting Equity, Ask qCamp Corp had the following balances i...

Ask qCamp Corp had the following balances in its stockholders'''' equity at jan 1: Common stock, $2, par value, 450,000 shares issued $900,000 Additional pd in capial 1,200,000 Ret

Change in profit sharing ratio, Change in profit sharing ratio When there...

Change in profit sharing ratio When there is a change in profit sharing ratio, it means that some of the partners will get higher profits based on the new ratios in the future wh

Regulated investment company, Regulated Investment Company (RIC) - Commonly...

Regulated Investment Company (RIC) - Commonly known as a MUTUAL FUND, this is a domestic corporation which acts as an investment agent for its shareholders by typically investing i

Finding the present value, We have discussed the computation of the future ...

We have discussed the computation of the future value in the previous sections; here let us work the process in opposite. Let us assume you have won a lottery ticket worth Rs. 1000

What do you mean by reasonable assurance, Q. What do you mean by Reasonable...

Q. What do you mean by Reasonable Assurance? Reasonable Assurance - Management's assessment of effectiveness of internal control over financial reporting is expressed at the le

Trial balance, methods of preparation of trial balance

methods of preparation of trial balance

Prepare a statement of partnership liquidation, After discontinuing the ord...

After discontinuing the ordinary business operations and closing the accounts on May 7, the ledger of the partnership indicate the following: Cash $75,000 Non cash 105,000 Liabilit

Calculation of the change in finance costs, Q. Calculation of the change in...

Q. Calculation of the change in finance costs? Past ACCA examiners have occupied inconsistent approaches regarding the calculation of the change in finance costs due to settlem

Explain r and r-squared- f-test and interpret its value, To decide in what ...

To decide in what zone should be placed a store which sells video-cassettes, the manager of a firm which sells and rents cassettes makes a study to estimate the demand for each sto

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd