BUSINESS ANALYSIS

Time allowed – 3 hours

Total marks – 100

[N.B. – Figures in the margin indicate full marks. Questions must be answered in English. Examiner will take
account of the quality of language and 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) A credit card company has a call centre. Cardholders with queries or complains call the centre
by telephone, where they are dealt with by the first junior operator to respond to the call. The
junior operators are required to deal with customers’ query or complaint if they can, and to refer
more complicated problems to a senior operator.

When customers have valid complaint about items incorrectly included in their monthly
statement, the accounts details must be corrected, and inappropriate interest charge must be
cancelled.

The costs of the centre are high, but the board of directors and the senior management believe
that proving a high quality service is essential to maintain the reputation of the company’s brand
name and the continued support of its customers.

Required:
As a person newly appointed to the role of manager of the call centre, identify the main risks
within the call centre and recommend the controls that should be implemented with respect of
those risks. 10

(b) Famous Co has just acquired a subsidiary called Woodbridge as part of a larger acquisition.
Famous Co has no other subsidiaries in the same business sector as Woodbridge, so
management are considering disposing of Woodbridge.
A small listed company called Ironbridge, whose core business is similar to Woodbridge, has
been identified, and by using all published and any other information reasonably available, the
following analysis has been prepared.
Woodbridge Ironbridge
Return on capital employed (ROCE) 14.9% 25%
Asset turnover 1.3 times 1.8 times
Net profit margin 11.5% 13.9%
Current ratio 1.5 times 2.2 times
Inventory holding period 68 days 57 days
Receivable collection period 54 days 43 days
Payables payment period 49 days 37 days
Other key information:
a. Ironbridge has a P/E ratio of 18
b. Woodbridge made an operating profit of Taka 68.8 mn
c. Woodbridge has total non-current assets of Taka 389.6 mn out of which land and building
comprise Taka 200 mn. Its net assets at book value are Taka 461.6 mn
d. The tax rate is 33%

Required:
As the management accountant of Famous Co, prepare a report to the directors in which you
analyse the performance of Woodbridge compared with Ironbridge, and recommend a price
which Famous Co ought to seek for the disposal of Woodbridge. 15

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2. (a) With the implementation of Indo Bangladesh agreement where Bangladeshi companies are
allowed to invest in India, P&Q Company which is based in Bangladesh is exploring the choice
of launching a new product either in Bangladesh or in India. The Company however, is lack of
fund meaning that it could not launch the product in both countries. The Company bases its
decisions on Expected Net Present Value (ENPV) and current exchange rates. As a result of
this methodology, and the details shown below, it was decided to launch in Bangladesh (with
an ENPV of Taka 28,392,000) and not India (with an ENPV of Taka 25,560,000).

Bangladesh India .
Probability Probability
Launch costs: Launch costs:
Tk. 145,000,000 0.1 Tk.190,000,000 1.0
Tk. 120,000,000 0.9
Annual cash flows: Annual cash flows:
Tk. 65,000, 000 0.4 Tk. 90,000,000 0.5
Tk. 42,000,000 0.4 Tk. 70,000,000 0.2
Tk. 24,000,000 0.2 Tk. 30,000,000 0.3

Required:
Discuss the risks associated with each launch option and advise how these risks may be
managed by the company. 12
(b) P&Q Company wishes to raise 3 year Tk. 500,000,000 floating rate finance to fund the product
launch and additional capital investment. P&Q Company has a choice between :
Alternative A: floating rate finance at LIBOR + 1.2% OR
Alternative B: fixed rate finance at 9.4%, together with an interest rate swap at a fixed
annual rate of 8.5% against LIBOR with a swap arrangement fee of 0.5% flat payable
upfront.
Required:
(i) Discuss the potential benefits and hazards of interest rate swaps as a tool for managing
interest rate risk. 6
(ii) Ignoring the time value of money, calculate the total difference in cost between the two
alternative sources of finance available to P&Q Company. 5

(c) Rivershore is a national hotel group that operates more than 20 hotels. The performance of the
manager of each hotel is evaluated using financial measures.

Many of the hotel’s managers are not happy. They believe that there can be conflict between
good performance and achieving short-term profits. They are also unhappy that their profit
reports include a share of head office costs and other costs that they cannot control.

Required:
(i) Recommend, with reasons, two non-financial measures that Rivershore could use to
evaluate the performance of hotel managers. 4
(ii) Explain why, and how, non-controllable costs should be shown in the profit reports. 3

3. (a) What are the key elements of competitor profiles? Why competitor analysis is so important in
formulating corporate strategies? 3
(b) What are the problems of applying value chain analysis for a service organisation such as ICAB
which provides professional accountancy qualification? 3
(c) AES Enterprises Ltd a public limited company in Bangladesh manufactures and supplies a wide
range of different clothing to retail customers from 150 stores located in three different
countries in the Eurozone.
In order to increase sales, a new internet site is being developed which will sell AES’s entire range
of clothes using 3D revolving dummies to display the clothes on screen. The site will use some new
compression software to download the large media files to purchaser’s PCs so that the clothes can
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 be viewed. This move is partly in response to environment scanning which indicated a new
competitor, Texline, will be opening an unknown number of stores in next one year.
AES Enterprise had to borrow substantial amount from a local development bank to finance the
software and the IT systems.
As a cost cutting move, the directors are considering delaying AES’s new range of clothes by
one year. Sales are currently in excess of expectations and the directors are unwilling to move
away from potentially profitable lines.

Required:
i) Explain the business risks affecting AES Enterprises Ltd and briefly describe how these
risks can be managed. 6
ii) AES Enterprises recognizes the importance of risk management strategies for an
organisation like it. At the same time it knows there are limitations of risk management
plans. Briefly describe limitations of risk management plans. 4

(d) Skill Bangladesh Limited is contemplating on buying a new machine at Taka 5,000,000 with an
additional working capital requirement of Taka 1,000,000. The machine is expected to have an
economic useful life of 5 years, with no salvage value. The firm follows the straight-line
method of depreciation and the same is accepted for tax purposes. The machine is expected to
generate an incremental increase in the before tax cash operating income of Taka 2,000,000 (in
real term) per year for a period of 5 years. The relevant tax rate is 35 per cent. Inflation is
expected to be 6 per cent per year and the firm’s cost of capital in real terms is 6 per cent.
Advise the company whether the machine should be purchased.

Required:
Show the NPV calculation in real terms. Assume the working capital requirement will remain
unchanged throughout the period, in spite of inflation. 7

4. (a) DSEAM Limited, a Bangladeshi company has been in international business for some years
selling self-powered equipment. It has recently expanded rapidly in Europe and Africa.
DSEAM’s products have been popular in Africa because they have been seen as more
economical than disposable battery-powered products, and because they do not require mains-
supplied electricity that may be unreliable or unavailable.
The board of DSEAM is considering establishing an operational presence in African country, to
enhance its sales operations in that continent and eventually to establish a manufacturing base
there to reduce costs of production and distribution. The board is considering what form the
operations should take and various financing issues.

Required:
(i) Briefly discuss the key risks DSEAM may be encountering with overseas investments. 4
(ii) Identify the factors that may influence the choice of finance for DSEAM overseas
operations. 2
(b) Discuss briefly four techniques a company might use to hedge against the foreign exchange risk
of adverse foreign exchange movements. 4
(c) Kenari Limited a medium-sized UK company with export and import trade with the USA. The
following transactions are due within the next six months. Transactions are in the currency
specified.
Purchase of components, cash payment due in three months: GBP 116,000
Sale of finished goods, cash receipts due in three months: USD 197,000
Purchase of finished goods for resale, cash payment due in
six months: USD 447,000
Sale of finished goods, cash receipt due in six months: USD 154,000

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Exchange rates (London market)
USD/GBP
Spot 1.7106 – 1.7140
Three months forward 0.82 – 0.77 cents premium
Six months forward 1.39 – 1.34 cents premium

Interest rates
Three months or six months Borrowing Lending
GBP 12.50% 9.50%
USD 9% 6%

Foreign currency option prices (New York market)

Prices are cents per GBP, contract size GBP 12,500

Calls Puts
Exercise price ($) March June Sept March June Sept
1.60 - 15.20 - - - 2.75
1.60 5.65 7.75 - - 3.45 6.40
1.60 1.70 3.60 7.90 - 9.32 15.35

Assume that it is now December with three months to the expiry of March contracts and that
the option price is not payable until the end of the option period, or when the option is
exercised.
Required:
(i) Calculate the net GBP receipts and payments that Kenari Limited might expect for both its
three and six month transactions if the company hedges foreign exchange risk on:
1. The forward foreign exchange market 3
2. The money market 3
(ii) If the actual spot rate in six months’ time turned out to be exactly the present six-month
forward rate, calculate whether Kenari Limited would have done better to have hedged
through foreign currency options rather than the forward market or the money market. 5
(iii) What do you consider to be the main advantage of foreign currency options? 1

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