1. The owners of a small manufacturing concern have hired a manger to run the company with the expectation that he will buy the company after five years. Compensation of the new Vice President is a flat salary plus 75% of the first $150,000 profit, then 10% of profit over $150,000. Purchase price for the company is set at 4.5 times earnings (profit), computed as average annual profitability over the next five years.
A. Assume the company will be worth $10 million in five years. Plot the profit of buying the company as a function of annual profit.
B. Does this contract align the incentives of the new vice president with the profitability goals of the owners?
C. Re-design the contract to better align the incentives of the new vice president with the profitability goals of the owners.
2. When bert purchased a life insurance policy four years ago he accidently stated he was one year younger than his actual age. If bert dies today how much will the insurance company pay?
A. nothing, B. policy face value, C. less than policy face value, D. More than policy face value.