Liquidate or Continue Operations
myID_+
priorDate_+
record_+
WET_+
fadeFactor_
Determine whether investors would rather liquidate the company or continue operations. (Modeled on 2018.Spring #12)
| statutory surplus |
S |
2000 |
| deferred tax asset |
DTA |
3000 |
| unearned premium reserve |
UEP |
4000 |
| undiscounted loss reserve |
R |
5000 |
| written premium (annual) |
WP |
100 |
| pre-tax income |
PTI |
100 |
| cost of liquidation |
CoL |
100 |
| cost of capital |
% CoC |
12% |
| tax rate (corporate) |
% tax |
0.35 |
| pre-paid acquisition cost |
% acq |
0.25 |
| discount factor for loss reserves |
% disc |
0.80 |
Formulas
invested capital
= S + ( % acq x UEP ) + ( 1 - % disc ) x R – DTA
PV(future income)
= (pre-tax income) x ( 1 - % tax ) / ( % CoC )
Note
( % acq x UEP)
is equity in the UEP
( 1 - % disc) x R
is equity in the undiscounted reserves
invested capital – CoL > PV(future income) → liquidate
invested capital – CoL < PV(future income) → continue operations
invested capital – CoL = PV(future income) → doesn't matter
Solution:
| DECISION (L/C/-) |
|
| invested capital – CoL |
|
| PV(future income) |
|
| pre-tax income that makes the decision irrelevant |
123456 |
→ shout-out to MM and mtl for finding bugs in this template (now fixed!)
