BUSINESS ANALYSIS

Time allowed – 3 hours

Total Marks – 100

[N.B- [The figures in the margin indicate full marks. Question must be answered in English. Examiner will take
account of the quality of language and of the way in which the answers are presented. Different parts,
if any, of the same question must be answered in one place in order of sequence]
Marks
1. (a) What is risk pooling? Give some examples of risk pooling. 4
(b) Describe briefly commonly used risk management process. 4
(c) One of the world’s largest banks based in Europe with operation in more than 60 countries around
the world commented in its 2011 published annual report “Regulatory changes may adversely
affect our business and ability to execute our strategic plan”. Can you further elaborate this
comment both from the Global and Bangladesh perspective applicable to a bank. 4
(d) Rata Ltd is a very old and well known multinational shoe manufacturer having more than 500
stores covering all 64 districts in Bangladesh. The company as whole is profitable and some
are consistently making high gross margin. However, many other stores in Dhaka and
Chittagong along with some in small towns are struggling and gross margins in those stores
have significantly reduced during recent months.
In order to follow the National Board of Revenue (NRB)’s mandatory requirement, all Rata
stores have been fitted with Electronic Cash Register. However, due to frequent load shedding
and poor electricity supply, most of the time these ECRs are not working and hence
transactions are not recorded on real time basis. But on a daily basis each store records details
of all sales made and inventories that fallen below re-order levels in a pro forma reporting
template and fax this document to the head office finance team. On the basis of this daily
statement from more than 500 stores management accounts and reports are prepared.
Inventory required by stores is ordered centrally by the head office finance team and these
orders are delivered from a central warehouse located in Tongi near Dhaka. The head office
team obtains required details to order from the daily statement provided by each store as
mentioned above. Once a store reports any item reaching below re-order level it takes
approximately 7 days to reach those items from Tongi warehouse to the respective store.
Recently a news item came in a daily news paper named “Bangladesh Protidin”, where it is
reported that some of the shoes manufactured by Rata ltd is causing sever skin diseases. Such
complains are mainly related to various “Hush Puppy” brand shoes, which are Rata’s flagship
and high margin shoe lines catering for both male and female customers. The Board of Rata is
not too concerned about this news article as they believe this is some sort of cheap media
stunt and may be driven by its competitions.
Rata Ltd has already celebrated its 50th anniversary of starting operation in Bangladesh and despite
frequent changes in shoe design and materials used in manufacturing process in shoe industry,
Rata ltd is quite slow to change its design as it likes to continue with established products as
opposed to spend on new designs/items with uncertainty whether it will be popular.
Requirements:
In your view is there any risk currently being faced by Rata Ltd? If so, identify those risks by
suitable categories, discuss the impact of those risks on Rata Ltd and also describe how such
impact can be minimized. 11

2. (a) Outsourcing has become a global phenomena and Bangladesh is also no exception. You have
recently read a news article in the Financial Express with the title “One of the mobile telecom
operators in Bangladesh to outsource its Information Technology (IT) functions to third party”.
What are the advantages and disadvantages of outsourcing arrangements involving IT
functions of an entity? 4

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(b) What are two alternative methods to calculate the NPV for international projects? 4
(c) How a product can be influenced by culture/geography? Add at least 4 examples. 4
(d) One of the leading Malaysian construction is considering undertaking a new project in
Bangladesh in connection with the proposed construction of Padma Bridge. This will require
an initial capital expenditure of USD 500 million, with no scrap valued expected at the end of
the five year lifespan of the project. There will also be an initial working capital requirement of
USD 250 million, which will be recovered at end of the project. Pre-tax net cash inflows of
USD450 million are expected to be generated each year from the project.
The project will be operating through forming a private limited company in Bangladesh and
income tax in Bangladesh will be charged at a rate of 37.5%. Due to such high profile nature of
the project it is expected that the National Board of Revenue (NRB) will allow the project to
claim full depreciation allowances on a straight line basis for tax purposes. Income tax is paid
at the end of the year following that in which the taxable profits arise.
There is an avoidance of double taxation treaty in place between Bangladesh and Malaysia
and as per this treaty any income from this project shall be only taxed in Bangladesh. It is also
expected that considering national interest for this mega project NBR would allow waiver
from withholding income tax on dividend payment from Bangladesh and Bangladesh Bank
would allow full repatriation of dividend and capital.
The current USD/Malaysian Ringgit (MYR) spot rate is 1 USD: 3.50 MYR and it is expected that
due to the ongoing problem with US economy and depressed global market outlook, USD will
depreciate against MYR by 10% per year.
A project of similar risk undertaken by the Malaysian company in their home country has a
required post tax rate of return of 12%.
Because of multi donor/investor involvements in Padma Bridge project, all its revenue and
costs shall be incurred in USD.

Requirements:
Calculate present value of the project for the Malaysian company. 10

3. (a) What is a Forward Rate Agreement (FRA)? Suppose a 2 v 5 Euro 5 million FRA is transacted
with a FRA rate of 4.5%. The 2 month forward period starts on the spot date and extends to
the settlement date. For this FRA, the reference rate on the fixing date is 4.7% (3 month EUR
LIBOR). What is settlement amount? 4
(b) What is a currency option? Bengal Jeans Ltd is expecting to receive USD 12.5 million in two month’s
time. The current spot rate is USD 1: BDT 80.50. Compare the results of the following actions:
(i) The receipt is hedged using a forward contact at the rate 79.75.
(ii) The receipt is hedged by buying OTC option from a bank, exercise price USD/BDT 80.00,
premium cost 12 Cents for each 100 USD.
In each case compute the results, if, in two months, the exchange rate moves to: 8
(i) 1 USD: BDT 83.25
(ii) 1 USD: BDT 78.50
(c) Gazipur Pharmaceuticals Ltd has decided to start a new third production unit. The machine
costs BDT 100 million and it would have a useful life of 6 years with a trade in value of BDT 20
million at the end of 6 years. Additional net cash generated from the machine would be BDT
22 million each year for 6 years.
A decision has to be taken on the method of financing the expansion into third unit. The
following two methods of finance are being explored:

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- The company could outright purchase the machine for cash, using cash bank loan facilities
on which the current interest rate is 14%, or
- The company could lease the machine under an agreement which would require payment
of BDT 22,500 at the end of each year for the next 6 years.
The company’s weighted average cost of capital, normally used for evaluating projects is 15%
after tax. The rate of income tax is 37.5%. If the machine is purchased, the company would be
able to claim an annual tax depreciation allowance of 20% on reducing balance method.
Requirement:
Advise the Managing Director of Gazipur pharmaceuticals Ltd on what would be the most
economical method of finance to acquire the machine. Also include any other matters which
shall be considered before finally deciding which method of financing should be adopted. 10

4. L and B Games have just produced a new computer game for teenage children. “we aimed at this
market segment because we believe that these are the customers who spend money on these
types of products” said the marketing director . “We also needed to have a new product because
some of our other games have reached the maturity stage of their product life cycle”.
Explain the following terms: 4
a. Market Segment
b. Product life cycle

b. What distribution channels would you suggest that the company use for the new product?
Explain your choice. 4
c. The marketing director knew that the price of the new game would be important in gaining
sales. Market research showed that market for such games was price elastic. 6
a. Explain what is meant by price elastic demand
b. What other factors should the company consider before deciding on the selling price for
the new game? Explain your answer.
d. Identify and explain one promotional method that the company could use to increase the
sales of the game. 4

5. An American multinational garment manufacturer is closing some of its factories in Bangladesh

and transferring production to Cambodia and Laos. The Chief Executive explained that it was
trying to reduce the costs to make the business more profitable. Both the Government and
the trade unions in Bangladesh were unhappy with the decision.
(i) Explain what is meant by multinational company
(ii) Identify and explain three factors that management of the company might have
considered before making the decision.
(iii) Explain one possible disadvantage to the Cambodian government of allowing a
multinational company to set up in Cambodia
(iv) Should governments intervene in business location decisions? Justify your answer.
(v) In some countries Governments pass laws that protect consumers. Using an example,
show how a consumer can benefit from such laws. 15

-The End-