Zeven Properties Limited (‘ZPL’) is a housebuilding contractor based in England specialising in building affordable private housing. ZPL’s shares are floated on the London Stock Exchange and are currently priced at £5 per share. The Board of Directors is planning an expansion, which will involve raising £10 million but has not decided on what form of finance should be raised. The Board is considering either a bank loan from the company’s existing bank (the Bank of Alba) or an equity investment from new shareholders. On a completely different topic, at a recent Board meeting one of the non-executive directors suggested that ZPL’s remuneration committee should consider scrapping the company’s current share option scheme, since executive directors could be rewarded by the scheme even when they did not perform well. A second non-executive director disagreed, saying the problem was that even when directors acted in ways which decreased the agency problem, they might not be rewarded by the share option scheme if the stock market were in decline. Required: Imagine that you work for Bank of Alba and are reporting to the Bank’s lending committee on the suitability of the Bank funding the proposed
Zeven Properties Limited (‘ZPL’) is a housebuilding contractor based in England specialising in building affordable private housing. ZPL’s shares are floated on the London Stock Exchange and are currently priced at £5 per share. The Board of Directors is planning an expansion, which will involve raising £10 million but has not decided on what form of finance should be raised. The Board is considering either a bank loan from the company’s existing bank (the Bank of Alba) or an equity investment from new shareholders.
On a completely different topic, at a recent Board meeting one of the non-executive directors suggested that ZPL’s remuneration committee should consider scrapping the company’s current share option scheme, since executive directors could be rewarded by the scheme even when they did not perform well. A second non-executive director disagreed, saying the problem was that even when directors acted in ways which decreased the agency problem, they might not be rewarded by the share option scheme if the stock market were in decline.
Required:
- Imagine that you work for Bank of Alba and are reporting to the Bank’s lending committee on the suitability of the Bank funding the proposed
Using only the financial statements of Zeven Properties Limited (the income statement, the
Please note – no calculations are required as there are no numbers available.
In addition to the financial ratios you have selected, what other information from the financial statements would you regard as critical in this scenario.
(five hundred)
- Imagine that you are a potential new shareholder considering investing in equity to help fund the proposed
Using only the financial statements of Zeven Properties Limited (the income statement, the statement of financial position and the cash flow statement) and its current share price, what financial ratios, maximum of 4 and relevant to this scenario, would you select to help assess whether you should consider investing more of your money into Zeven Properties Limited in the form of equity? Explain fully your choice of financial ratios.
Please note – no calculations are required as there are no numbers available.
In addition to the financial ratios you have selected, what other information from the financial statements would you regard as critical in this scenario.
( five words)
- Explain in detail the nature of the agency problem and critically evaluate the use of share option schemes as a way of reducing the agency problem in
(five words)
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