Dec+2018+BG+Examiner 27s+guide

BUSINESS
VALUE,
GOVERNANCE
AND RISK
PROFESSIONAL PROGRAMME
EXAMINER’S GUIDE:
DECEMBER 2018 EXAMINATION
The contents of this examiner’s guide are intended
as a guide and not professional advice. Although
every effort has been made to ensure that the
contents of this guide are correct for the
examination session indicated at the time of going
to press, the Singapore Accountancy Commission
makes no warranty that the information in this
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©
Singapore Accountancy Commission 2019
SINGAPORE CA QUALIFICATION | BUSINESS VALUE, GOVERNANCE & RISK
Contents
Page
Introduction 3
Section 1
Module Objective 5
Section 2
Marks Allocation and Examination Format 5
Section 3
Examiner’s Report 6
Section 4
Examination Questions 10
Section 5
Suggested Solutions for Individual Questions 29
Section 6
Common Examination Verbs 51
© 2019 Singapore Accountancy Commission Page 2 of 57

INTRODUCTION
Disclaimer
The examination questions and suggested solutions in this publication have not been
updated for any changes in legislation, standards or syllabus. They must be used with
caution when preparing for any examinations.
Please also note that the solutions listed in this document are “suggested” solutions
only. Candidates who provide alternative, valid answers not covered in this document
will be awarded the appropriate credit.
For educational purposes, the suggested solutions are intended to be more
comprehensive and detailed than would be expected from a Candidate taking the
examination.
The Examiner’s Guide

The SAC provides the Examiner’s Guide to help Candidates to be better prepared for
the Singapore CA Qualification examinations. The Examiner’s Guide provides the
examiner’s report and suggested answers to the December 2018 Examinations.
Candidates are advised to approach the Registered Learning Organisations (RLOs)

for tuition support and should they have any queries.
About the Singapore Accountancy Commission (SAC)

The Singapore Accountancy Commission is the lead agency that spearheads the
development of Singapore’s accountancy sector with the vision of developing
Singapore into a leading global accountancy hub. SAC is working to achieve this
by deepening the skills of the accountancy talent pool; developing the industry;
and creating a hub and exchange by building Singapore into a centre for thought
leadership. It is a statutory body under the Ministry of Finance.
For more information, please visit www.sac.gov.sg
About the Institute of Singapore Chartered Accountants (ISCA)

The Institute of Singapore Chartered Accountants (ISCA) is the national accountancy
body of Singapore. ISCA’s vision is to be a globally recognised professional
accountancy body, bringing value to our members, the profession and wider
community. There are over 32,000 ISCA members making their stride in businesses
across industries in Singapore and around the world.
Established in 1963, ISCA is an advocate of the interests of the profession.

Possessing a Global Mindset, with Asian Insights, ISCA leverages its regional
expertise, knowledge, and networks with diverse stakeholders to contribute towards
Singapore’s transformation into a global accountancy hub.
ISCA is the Administrator of the Singapore CA Qualification and the Designated Entity
to confer the Chartered Accountant of Singapore - CA (Singapore) - designation.

ISCA is a member of Chartered Accountants Worldwide, a global family that brings

together the members of leading institutes to create a community of over 1.8 million
Chartered Accountants and students in more than 190 countries.
For more information, please visit www.isca.org.sg

Section 1
Module Objective
Upon completion of the Business Value, Governance & Risk module, Candidates
will be able to demonstrate a sound understanding of the basis upon which
corporate value is created, maintained sustainably (e.g. sound investment
decisions) and protected (e.g. by avoidance of excessive concentration of power
and lack of scrutiny of management). Candidates will be able to assess how
governance arrangements may prevent long-term dysfunctional behaviour. The
module addresses risk management as a key factor in governance and strategy. It
develops skills from previous studies in asset valuation in the context of wider
considerations of capital investment appraisal, including strategic investment
decisions, taking into account underlying financial risk management concepts for
effective and responsible decision making.
Section 2
Marks Allocation and Examination Format
Question 1 – (a), (b), and (c) 18 marks

Question 3 – (a), (b), (c), (d) and (e) 30 marks
This module is assessed by way of a 3-hour 15 minutes open-book, essay and case-
study based examination, and requires the use of a personal laptop. There are four
questions, and each question may have multiple parts requiring structured
responses. For instance, short answer questions, essay style questions,
computations, or standard format questions.
In order to achieve a pass in this module, a Candidate must achieve at least 50% of
the available marks in the final examination.

Section 3
Examiner’s Report
General comments
This examination consisted of a single case study with financial and industry data.
Considering the nature of the topics examined in this module, the question paper
was divided into two sections of equal weight.
The case study company was a medium sized designer of microchips, manufacturer
and retailer of a low priced range of personal computers which targeted
predominantly the Singapore market. The company planned to divest its
manufacturing site to fund international expansion.
Governance & Risk component – Questions 1 and 2 (50 marks)
Question 1 covered corporate governance while Question 2 covered risk

management. Generally, Candidates fared better in Question 1 as compared with
Question 2 because Candidates could refer to the code of corporate governance to
provide the appropriate answers. However, for both questions and similar to the past
examinations, there were Candidates who did not read the questions carefully and
therefore marks were lost. Some Candidates also provided very general/ generic
answers to questions that were not relevant to what was being asked.
Business Value Component – Questions 3 and 4 (50 marks)
Question 3 tested Candidates on determining a risk adjusted rate of return to

evaluate the value of its manufacturing subsidiary and recommend a range of
valuations to the Board of Directors, value additional possible synergies and explain
the merits and demerits of the methods of valuation specified by the scenario.
Overall, the question was adequately answered with numerical works methodically
completed, although it was observed that some Candidates struggled to get started.
The higher skill of relating the valuation findings to the Board of Directors and linking
to a negotiation strategy was less well done overall. The majority of Candidates
could improve their consideration of the implications of their results to the company
in the scenario and use judgements to determine a suitable starting point for
negotiation.
Question 4 assumed that the company was now in a position to acquire a new start-
up company which has technology which fits with the company’s strategic aims.
This question required three straight forward valuation methods to be computed
which in many instances were poorly answered as it was clear Candidates were not
well-prepared. For example, many Candidates were not able to value intangible
assets using the premium method.
Overall, for this paper, Candidates performed better for the Business Value portion
than they did for Governance and Risk portion.

Future BG Candidates are advised to understand and practice all valuation methods
included in the BVGR Study Text as these skills are vital to the ability of appraising
the value of an asset, project, subsidiary or company.
Analysis of individual questions
Question 1
There were 3 parts to this question. Candidates were required to assess the
independence of the candidates who were proposed by the non-independent
Chairman to replace the current retiring independent directors (IDs); to comment on
the current selection process for the IDs; and on board diversity.
Part (a): Most Candidates fared well on this question. Candidates were able to quote
the relevant SGX rules on independence and to comment on whether the nominees
were independent. However, some Candidates did not read the question carefully
and commented instead on the independence of the current board.
Part (b): Candidates did reasonably well on this question and were at least able to
mention that the Nominating Committee (NC) should carry out a process to select
the candidates to replace retiring board members instead of accepting only those
provided by the Executive Chairman. Most Candidates were also able to mention
that the lead independent director should be a member of the NC.
Part (c): This question was well answered. Candidates had demonstrated their
understanding of the requirements over board diversity such as age, industry
experience and gender.
Question 2
This question is about risk management with a focus on managing risks during a
crisis. There were 4 parts to this question, all of which focused specifically on the
case scenario. Most Candidates did not do well in all 4 question parts, reflecting a
weak understanding of risk management. Similar comments about Candidates’
weakness in risk management knowledge were also made in past examiner’s
reports. This has consistently been the weakness area of Candidates over the past
few exams.
In all 4 question parts, many Candidates did not provide answers relevant to the
case scenario but provided generic answers.
Part (a): This question required Candidates to identify possible actions in relation to
the crisis that management could take to alleviate the potential disruption.
Candidates who were able to identify specific actions were awarded marks. Some
Candidates discussed general enterprise risk management (ERM) or risk
management concepts instead of specific actions. No marks or poor marks were
awarded for these answers.
Part (b): Candidates had to comment on the Chairman’s statement on whether this
crisis was unforeseen. Candidates who took a firm position, i.e. agree or do not
agree, were given marks for their respective discussions. Some Candidates sat on

the fence and would agree and then disagree. No marks or low marks were awarded
for such answers.
Part (c)(i): Candidates had to identify the new or emerging risks arising from the
collapse of the shipping company and briefly discuss why these risks were
significant. A large number of Candidates described generic risks which was not
directed at the specific event, and were not awarded marks.
Part (c)(ii): Candidates had to identify factors that have contributed to the crisis in
the company, and the corresponding mitigating measures that management should
take to become more resilient in a similar crisis in the future. Again, a number of
Candidates failed to identify the appropriate factors or mitigating measures.
Question 3
Part (a) required the calculation of a risk adjusted return using a similar industry
beta which was generally answered well by the Candidates.
Part (b) was a straight forward analysis of reservations when using CAPM theory in
practice and was described very well by most Candidates.
Part (c) required a subsidiary valuation using the free cash flow method. This was
well attempted, with many Candidates providing a correct or reasonable calculation.
It was clear that those who failed this part of the question have not sufficiently
practised this valuation technique to provide the precision and logic which this
method requires.
Part (d) was the most difficult requirement in this question as it required Candidates
to consider the acquisition from the buyer’s perspective and understand why a
company may be prepared to pay an acquisition premium due to risk, revenue and
cost synergies. Many Candidates were unable to respond to this requirement in a
meaningful way, or provided workings which lacked clarity or explanation.
Part (e) required Candidates to advise the directors of the merits and demerits of
divesting the manufacturing subsidiary. This final requirement was generally well
done, although too many Candidates provided generic rationale without fully
considering the nature of the subsidiary or the impact on the product and retailing
subsidiary.

Question 4
Part (a) required Candidates to value a potential acquisition of the start-up company
using the net asset method, the multiple of earnings method and the free cash flow
method. In doing the calculations, Candidates should have been thinking about the
appropriateness of these methods to a new technology company which would not
have many assets or a stable trading history. It was observed that many Candidates
were unable to value the intangible assets by valuing an earnings premium as a
perpetuity. The multiple of earnings methods was generally well answered although
many Candidates failed to adjust a listed company price to earnings ratio when
valuing a non-listed company. Overall, Candidate answers to the free cash flow
valuation method were incorrect as the information provided in the scenario provided
clear growth rates to apply to each revenue and cost stream but many Candidates
took an average of these growth rates rather than apply them individually. Overall,
Candidates did poorly for this question part.
Part (b) required Candidates to explain the result of the valuation and recommend
a suitable price to commence negotiations. Only a few Candidates were able to
respond to this requirement well by considering the nature of the company being
valued. Instead, many Candidates provided generic statements about each of the
methods of valuation.
Part (c) required Candidates to demonstrate their general understanding of the

three methods of valuation required by part (a) and this part of the question was
generally well answered.

Section 4
Examination Questions
Singapore CA Qualification Examination

11 December 2018
Business Value, Governance & Risk
INSTRUCTIONS TO CANDIDATES:
1. The time allowed for this examination paper is 3 hours 15 minutes.
2. This examination paper has FOUR (4) questions and comprises NINETEEN (19)
pages (including this instruction sheet). Each question may have MULTIPLE
parts and ALL questions are examinable.
3. This is an open book examination. During the examination, you are allowed to
use your laptop and any calculators that comply with the SAC’s regulations.
Please note that mobile phones, tablets, and all other electronic devices MUST
NOT be used during the examination.
4. This examination paper is the property of the Singapore Accountancy
Commission.
MODULE-SPECIFIC INSTRUCTIONS:
5. This case is hypothetical and has been written exclusively for the purpose of this
examination. Names, characters, places and incidents used are imaginary or
fictional. Any resemblance to actual events or locales or persons, living or dead,
is entirely coincidental. This case is not to be cited without the permission of the
Singapore Accountancy Commission.

Company Background Information

(Applicable to all the questions)
ComTech Ltd is a medium size company listed on SGX Catalist. It designs and
assembles personal computers using its own patented brand of microchip. ComTech
develops microchips from its manufacturing plant in Jurong, Singapore and assembles
personal computers from its product assembly plant in Tuas, Singapore. It sells to a
loyal group of Singapore and regional electronic stores. ComTech’s microchip has
exceptional processing speed and power and it is sold at a price that is lower than its
competitors. The company is expanding quickly as it sells to an increasing number of
electronic retail stores each year. About 10 customers are added each year. Recently
in August 20x1, ComTech won a contract to supply a large number of laptops to two
Singapore government agencies over the next 6 months (October 20x1 to March
20x2). This is the first time ComTech has won a sizeable government contract.
ComTech operates an online system which enables all the electronic stores to place
orders. ComTech does not have an in-house Information Technology (IT) department
as it outsources all its IT functions to IBM Singapore. In order to allow ComTech to
focus on its core competency, the management also outsources other areas such as
payroll processing and accounting to other service providers.
The overseas electronic stores are billed in Singapore dollars (S$) and payment from
all the stores is due 90 days after delivery. The online system also allows companies
and individuals to buy ComTech’s computers on an ad hoc basis and payments are
made through credit cards. Sales volume from this sales channel has been growing
annually.
ComTech’s business objective is to sell computers that are reliable, of high quality and
affordable. Hence, it only procures its inventory from two reputable companies,
namely, Samsung and Toshiba. ComTech purchases electronics components, such
as motherboard and disk drive, directly from Samsung in Korea, while other hardware
components, such as keyboard and monitor, are purchased from Toshiba in Thailand.

Question 1 – (a), (b) and (c)
Board Matters
ComTech’s current board consists of 7 directors as shown below:
Name Board Role Brief Background Years Age

with
Board
Daniel Executive Founder & NC* member 18 90
Lee Chairman
Henry Executive Chief Executive Officer (son- 10 65
Subianto Director in-law of Chairman)
Hamid Executive Chief Operating Officer 8 70
Zaid Director
Hanson Lead AC** Chair. Partner of a 6 70
Hong Independent medium size accounting firm
Director
Mike Independent NC* Chair. Owner of a 5 69
Hague Director Human Resources consulting
firm
James Independent AC** member. Doctor and 9 70
Ng Director owner of a healthcare
products company
Alex Tan Independent AC** and NC* member. 9 60
Director Owner of a building
construction company
* NC: Nominating Committee
** AC: Audit Committee

In accordance with good corporate governance practice, the Board decided that
James and Alex will retire. Following this, the Executive Chairman offered the names
of 5 candidates (all known to him) for the NC’s consideration. He provided only a very
brief background of each candidate as shown below:
List of Candidates to replace retiring board members

Candidate Brief Background Provided by Executive Chairman
Abram Chief Executive Officer (CEO) of one of ComTech’s outsourced
Thomas service providers
Bruno Tan Retired audit partner of Company’s current external audit firm
Carissa Tan Retired Chief Operating Officer (COO) of ComTech
Darius Lim Current Head of Corporate Banking of DBS Bank
Eileen Low Current CEO of a SingTel Limited’s subsidiary. SingTel is the
provider of telecommunication services to ComTech.
The NC proceeded with the selection based on the information provided by the
Executive Chairman in the above table.

Examplify
Question Question 1 required:
Number
1 (a) Critically evaluate whether each of the above candidates is

independent. Identify any additional information that may be
required and the potential impact the additional information
may have on your conclusion. (10 marks)
2 (b) Considering the composition of the Nominating Committee and

the nomination process, identify two areas where the
Nominating Committee Chairman should have taken steps to
ensure good governance in the selection process.
(4 marks)
3 (c) Comment on TWO aspects of the current board diversity that

the Nominating Committee should take into account when
selecting new directors. (4 marks)
(Total: 18 marks)

A crisis situation arose one month (i.e. September 20x1) after winning the government
contract. Samsung Korea uses Hanjin Shipping, the largest in South Korea and 7th
globally, to ship all its exports. Hanjin Shipping is on the brink of bankruptcy and some
of its ships have been seized by creditors. Its collapse is expected to cause significant
disruption to the global supply chain and will last for several months. As the largest
shipping company in South Korea, exporters including Samsung are facing
tremendous difficulties in finding alternative transport for their goods.
ComTech’s inventory policy is to maintain only one-month of inventory level to save

on holding costs and avoid the risk of stock obsolescence. This one-month inventory
policy, and Samsung’s facing difficulties with their shipments, will jeopardise the
contracted delivery of computers to the two government agencies and exposes
ComTech to liquidated damages.
A crisis management committee, chaired by the Chief Executive Officer (CEO), was
formed almost two weeks into the crisis after the inventory manager alerted that
components inventory has fallen significantly and were not replenished. The delay in
forming this committee was because the management personnel responsible for
procurement and inventory management have never experienced a similar incident in
the past. In addition, the Supply Chain manager was on overseas vacation and
uncontactable. Therefore, there was a lack of ownership over managing this crisis.
This can be seen from the late escalation of the potential inventory shortages, the
uncertainty of who should the escalation be made to, and who in management should
be a member of this crisis management committee. The CEO subsequently defined
the committee’s objective as being to identify measures necessary to avert a disruption
to fulfilling the government contract.

Examplify Question 2 required:

Question
Number
4 (a) What are FOUR possible actions, in relation to the crisis, that
management could take to alleviate the potential disruption to
the two government agencies? (8 marks)
The Chairman believes that this Hanjin Shipping incident that hit
ComTech was a black swan as he has never experienced an
incident of such scale and magnitude in his 18 years of managing
the company. He felt that the event was unforeseen.
5 (b) Do you agree with the Chairman that this crisis is unforeseen?
Discuss. (4 marks)
(c) The Board was not satisfied with the management on how the
crisis was handled and was of the view that measures must be
implemented to reduce the risk impact from a similar crisis in
the future. Your firm has been appointed to identify the factors
that have contributed to the crisis in ComTech, and to
recommend mitigating measures to help ComTech be more
resilient to a similar crisis in the future.
6 (i) From the collapse of Hanjin Shipping, identify FOUR

new or emerging risks arising that ComTech is exposed
to, AND briefly discuss why these risks are significant.
(8 marks)

Examplify
Question
Number
7 (ii) Identify THREE factors that have contributed to the

crisis in ComTech AND the corresponding mitigating
measures that management should take to become
more resilient in a similar crisis in the future.
(12 marks)
(Total: 32 marks)

Question 3 – (a), (b), (c), (d) and (e)
It is now December 20x3 and the Chief Executive Officer (CEO) of ComTech, Daniel
Lee, has been encouraged by the recent sales figures that he is now considering
implementing a new strategic objective to manufacture and sell its computers in
international markets. Daniel is looking at ways to raise capital to fund expansion into
the Malaysian and Indian computer retail markets and market its online sales system
across the Asia Pacific region to increase its online presence.
ComTech has four operating subsidiaries: retail, online sales, microchip

manufacturing and product assembly. Each subsidiary is managed independently by
a managing director who reports directly to the ComTech parent company.
Potential divestment
Four years ago, ComTech invested in developing a large, state of the art
manufacturing plant in Singapore with the capacity to manufacture microchips at
approximately three times its current production volume. The manufacturing plant also
has the potential to expand its production capacity. This manufacturing plant is owned
and managed by the microchip manufacturing subsidiary. It was envisaged that
ComTech would manufacture microchips for other companies, but this is proving to be
a challenging strategic goal to meet and at this time, the board of directors cannot see
a strategic use for the plant’s excessive spare production capacity.
ComTech is already highly geared as it borrowed a substantial amount to establish

the microchip manufacturing plant and therefore further borrowing is not an option at
this time. Therefore, the board of directors of ComTech is looking at a divestment
strategy to sell its microchip manufacturing subsidiary and outsource the production
of microchips to an external supplier.

The most recent results for the microchip manufacturing subsidiary for the year to 30
September 20x3 are as follows:
S$ (Singapore dollars) million
Revenue 47.6
Cost of sales (12.4)
Production overheads (20.0)
Operating profit 15.2
Corporate tax at 17% (2.6)
Profit after tax 12.6
Note that all external and inter-company microchip sales are transacted at arm’s length
prices.
The objectives of this sale are to raise capital to fund a marketing programme to raise
brand awareness and also invest in research and development to increase its product
offerings so as to generate a higher demand for its computers in Malaysia and India.
The marketing programme includes marketing of its online sales platform across Asia.
Investment in research and development includes funding of the design and
development of enhanced microchips and possibly acquiring innovative young
technology start-up companies to extend ComTech’s range of computer products.
ComTech has identified a listed company, IndScan Limited (“IndScan”), which

manufactures high specification computerised analytical devices for the medical,
pharmaceutical and chemical industries. IndScan is looking to purchase its own
microchip manufacturing and research facility.
IndScan has indicated that it is willing to provide a long term supply contract to
continue manufacturing ComTech’s microchips at existing production levels as a
condition of the sale agreement and use the plant’s spare capacity to manufacture
microchips for its own industrial analytical and research devices.

Market information
ComTech has in issue 60 million ordinary shares trading on SGX Catalist. The market
value of each ordinary share is S$2.50. The company is also financed by 7% bonds
with a nominal value of S$100 per bond, which will be redeemed in 6 years' time at
nominal value. The bonds have a total nominal value of S$60 million. Interest on the
bonds has just been paid and the current market value of each bond is S$105.
Daniel Lee has identified a very large microchip manufacturing company in Taiwan.
This company has a quoted equity beta of 1.5, an equity market value of S$540 million
and a market value of the debt of S$120 million. He also considers the risk-free rate
of return to be 3.5% per annum and the average return on the stock market to be 8.5%
per year. Corporation tax is expected to remain at 17%.
Daniel Lee considers the gearing expectation by ComTech investors of the microchip
division to be the same as the company as a whole.
Valuation and potential synergy

The divestment of the microchip manufacturing subsidiary was discussed at the board
meeting held on 30 November 20x3 where the CEO said he believes:
 The free cash flow method is the most appropriate method to value the microchip
manufacturing subsidiary. He suggests that profit after tax is a good approximation
to free cash flow. Recent year’s annual capital expenditure at the subsidiary has
been approximately equal to its depreciation charge. Using a simplified
assumption, future working capital is expected to remain at current levels;
 Revenue at the microchip division is expected to grow at 5% per annum for the
next four years, and then remain constant at the same value for all years thereafter;
 Cost of sales at the microchip division is expected to grow at 3% per annum for the
next four years, and then remain constant at the same value for all the years
thereafter;

 No change in overheads is forecasted from current levels;
 All debt will remain with ComTech following the divestment of the microchip
division. However, Daniel wants the free cash flow valuation determined at
ComTech’s existing risk adjusted weighted average cost of capital to a similar large
microchip manufacturing companies;
 Present all valuations at 30 September 20x3 values; and
 The potential acquirer is likely to benefit substantially from three types of synergy
which increase the value over and above ComTechs’ current valuation as follows:
1. Revenue synergy - IndScan is expected to create at least an additional S$7

million of gross profit in the first year by using growth from the manufacturing of
its own microchips which is expected to grow at 10% per annum for the next
three years and then remain constant at the same value for all years thereafter;
2. Cost synergy - IndScan will save 25% of the subsidiary’s existing overheads
through economy of scale efficiencies as IndScan utilises its spare
manufacturing capacity; and
3. Financial risk synergy - IndScan is a very large, ungeared, cash-rich company

with a current quoted beta of 1.1 so its investors are highly likely to have
different risk and return expectations as ComTech’s shareholders.

Examplify Question 3 required:

Question
Number
8 (a) Determine an appropriate discount rate which ComTech can

use to evaluate the sale of its microchip manufacturing
subsidiary. Present your answer to the nearest whole
percentage. (8 marks)
9 (b) Discuss any TWO considerations concerning the use of the

Capital Asset Pricing Model (CAPM) to determine the discount
rate in part (a). (2 marks)
10 (c) From the selling company’s perspective, compute the

enterprise value of ComTech’s microchip manufacturing
subsidiary, using the free cash flow valuation method and year-
end discount factors, to establish a minimum selling price and
comment on why this is a minimum value. Ignore acquisition
synergy and present your answer to the nearest million
Singapore dollars. (8 marks)
11 (d) From the acquiring company’s perspective, determine a

maximum enterprise value of its subsidiary by including
revenue, cost and financial risk synergies which will assist
ComTech in its negotiations with IndScan to divest the
microchip manufacturing division. Comment on why the
maximum enterprise value may not be realised on sale. Use
the free cash flow valuation method and year-end discount
factors for your computation. Present your answer to the
nearest million Singapore dollars. (8 marks)

Examplify
Question
Number
12 (e) Evaluate the advantages and disadvantages of divesting the

microchip manufacturing subsidiary. (4 marks)
(Total: 30 marks)

ComTech has recently identified an unlisted new start-up company, TechEase Pte Ltd
(“TechEase”), also based in Singapore. TechEase manufactures and sells its
TabEase brand of tablet smart devices using its innovative software which is designed
to optimise the ease of user social media interactions. Due to this design feature, the
TabEase tablet device is showing signs of market growth and consumer approval in
Singapore.
Since its launch, the TabEase has experienced high growth but TechEase is struggling
to improve its margin and manage the high production and distribution costs of the
TabEase product. TechEase is currently ungeared and has been funded by equity
contributions from its founders and a local tech entrepreneur but it has been unable to
secure a loan facility as it is perceived as a high-risk technology start-up company.
TechEase is also experiencing working capital issues and the existing owners are
therefore considering selling a 75% stake in TechEase so a larger company can
provide the financial resources, manufacturing and distribution infrastructure it needs
to optimise the future growth potential of the TabEase product.
The directors of ComTech are excited about the future potential of the TabEase tablet
as it will allow the company to extend its product range of laptops into the tablet market.
Also, the introduction of the ComTech microchip is believed to have the potential to
create a very high-performance tablet in the affordable price bracket.

In order to evaluate the potential acquisition, the directors of ComTech would like to
complete the following three valuations so the Board can consider a 100% acquisition
or a 75% acquisition of TechEase:
1. Net assets basis valuation at 30 September 20x3 values, and a net asset
valuation which includes an estimate for the intellectual property and brand
value of TabEase product;
2. Future maintainable earnings basis valuation, by applying market multiples

to (i) current 20x3 earnings and (ii) forecast 20x4 earnings; and
3. A free cash flow valuation at 30 September 20x3 values based on the 20x4
forecast and applying expected growth rates for revenue and costs.

Below is the summary of financial data for TechEase for 20x3 and forecast revenue
and costs for 20x4 in thousand Singapore dollars:
Statement of profit and loss for the years ended 30 September
Actual Forecast
20x3 20x4
S$’000 S$’000
Revenue 738 815
Cost of sales (533) (563)
Overheads (120) (150)
Profit before taxation 85 102
Taxation (14) (17)
Profit after taxation 71 85
Statement of financial position at 30 September
20x3
S$’000
Assets
Property, plant and equipment 242
Current assets 57
Total Assets 299
Equity
Share capital (Shares of S$1) 50
Retained earnings 92
Total Equity 142
Liabilities
Current liabilities 157
Total Liabilities + Equity 299

Additional information and assumptions about the valuation of TechEase

provided by the directors of ComTech on 1 December 20x3 are listed below:
1. When valuing potential intangible assets and intellectual property, the directors
would like you to use a pre-tax return on total assets of 15% which is the average
return for the technology sector in the past three years;
2. Over the past 12 months, the average P/E ratio for technology entities quoted on
various stock exchanges in Asia has been 18. It is thought that TechEase might be
able to command a P/E ratio premium, 30% higher than the market average;
3. The directors of ComTech understand that technology start-up companies are

riskier than established large and listed companies. Therefore, the directors
consider a 20% return as sufficient when discounting TechEase’s future cashflows;
4. Growth for beyond 20x4 is assumed to be, indefinitely:

 Revenue - 8% per annum;
 Cost of sales - 3% per annum; and
 Overhead - 2% per annum.
5. Corporation Tax has been payable at 17% per annum and this rate is expected to
continue.

Examplify
Question Question 4 required:
Number
13 (a) Using the THREE methods of valuation requested by the

directors of ComTech, provide a summary of the range of
possible valuations of TechEase for both a 100% acquisition
and a 75% acquisition. You are required to use year-end
discount factors, where applicable. Present your answers to
the nearest thousand Singapore dollars. (11 marks)
14 (b) Explain the results of the valuations from part (a) and
recommend, with justifications, a suitable price to commence
negotiations. (3 marks)
15 (c) Discuss the relative merits and drawbacks of the three methods
of valuation. (6 marks)
(Total: 20 marks)
END OF PAPER

Section 5
Suggested Solutions for Individual Questions
Question 1 – (a), (b) and (c) (Total: 18 marks)

(a) Critically evaluate whether each of the above candidates is independent. Identify
any additional information that may be required and the potential impact the
additional information may have on your conclusion. (10 marks)
 Abram is CEO of one of ComTech’s OSP. An independent director is one who

is independent of conduct, character and judgement, and has no relationship
with the company. The NC needs to establish whether the OSP concerned is a
material provider of services. If it is, this will impair on independence and Abram
should not be appointed. If services provided by the OSP is immaterial, Abram
may be considered independent but will have to recuse himself from
transactions involving the OSP.
 Bruno is a retired audit partner of ComTech. NC needs to know when he retired

and whether he still has a financial interest in the accounting firm. If he had
retired beyond the minimum period stipulated by the SGX Listing Rule and has
no financial interest in the firm, he will qualify as an independent director.
 Carissa is a retired COO of ComTech. If she had retired more than 3 years ago,
she will qualify as an independent director.
 Darius is head of corporate banking of DBS Bank. NC will need to know whether
ComTech has any banking relationship with the Bank. If there is none, Darius
will qualify as an independent director.
 Eileen is CEO of a SingTel subsidiary. Although ComTech buys

telecommunication services from SingTel, NC may wish to know she is the CEO
of which subsidiary of SingTel, given that ComTech may not be buying services
from this subsidiary. Nevertheless, there could still be a perceived lack of
independence, especially in situations when disputes arise between ComTech

and SingTel over the latter’s services. Hence, she should not be considered
independent.
(b) Considering the composition of the NC and the nomination process, identify two
areas where the NC Chairman should have taken steps to ensure good
governance in the selection process. (4 marks)
 The number of candidates should not be confined to those offered by the Executive
Chairman since these Candidates are his friends. NC Committee should therefore
have taken steps to search for additional candidates.
 The Lead Independent Director should be a NC member instead of the Executive

Chairman.
(c) Comment on TWO aspects of the current board diversity that the NC should take
into account when selecting new directors. (4 marks)
 Current board members are mainly businessman (ie CEO of businesses), some of
them are from industries that are not related to that of ComTech. To avoid
groupthink, the board should comprise members of different background, skills and
experience, such as one who is legally-trained.
 Gender diversity – currently the board is dominated by male which is not consistent
with the Code of Corporate Governance. NC should seek out for more female
candidates and Carissa could be given priority to be appointed an ID if she qualifies
as independent.
 Age – all board members are above 60 years of age. Again, to avoid groupthink,
younger board members should be appointed as they may be able to offer fresh
perspectives to ComTech’s business. ComTech’s business probably faces
technological and digital disruption and younger board members with IT
background will be able to help steer the business strategies to stay relevant.


(a) What are FOUR possible actions in relation to the crisis that management could
take to alleviate the potential disruption to the two government agencies?
(8 marks)
Possible actions:
 Suspend the online order system for corporates and retailers to preserve
finished stock level as this has the least impact on delivery commitment.
 Negotiate with IT stores to delay or reduce shipment since this is not subject to
liquidated damages.
 Negotiate with IT stores (especially those in Singapore) to return their

inventory of computers so that these could be used to fulfil the government
contracts (subject to hardware configurations).
 Open discussion with the two government agencies to explore the possibility of
extending the delivery timeline by, for example one or two months.
 Check alternative sources of supply. For example, (a) since Toshiba is a large
supplier and manufacturer of computer equipment, can they supply the
components needed; or (b) can Samsung Korea supply the components from their
other overseas factories?
(b) Do you agree with the Chairman that this crisis is unforeseen? Discuss.
(4 marks)
Agree with the Chairman that the crisis is unforeseen. This is because the event
was unprecedented, rare and of a major scale that led to a major disruption to
the global supply chain, affecting many countries which were importing goods
from South Korea. As the Chairman had mentioned, this is not something that
has happened to ComTech in his 18 years managing the company.

Alternative solution
Do not agree with the Chairman that the crisis is unforeseen. This is because the
supply disruption is part and parcel of businesses such as ComTech business.
The non- performance of Hanjin should therefore not be totally unexpected to
Samsung and ComTech. Given the concentration risk in ComTech’s supply chain,
a failure of any party in the supply chain would have been disruptive, whether
caused by a supplier, shipper, logistics suppliers, or others. ComTech’s
management should have identified the high concentration risk in their supply
chain due to its extremely high impact on the organisation. Therefore, this should
be included in the ComTech’s risk universe to ensure that the risk is assessed
regularly. In addition, a business continuity plan should also be implemented
to ensure that their supply chain can continue during the time of crisis.
(c)(i) From the collapse of Hanjin Shipping, identify FOUR new or emerging risks
arising that ComTech is exposed to, AND briefly discuss why these risks are
significant. (8 marks)
Risks:
 Supply disruption - If ComTech is unable to find alternative vendors for its
inventory and given that inventory level is already running low, ComTech’s
production will grind to a halt. This will adversely affect its ability to supply
computers to its group of electronic stores, and more importantly, to the two
government agencies which are new business relationships that ComTech wishes
to develop. The timing of the event (September) is also very unfortunate as the
electronic stores may be stocking up for the year-end festive season.
 Loss of stores loyalty - If ComTech’s production grinds to a halt due to the

lack of inventory, it may not be able to supply computers to its group of loyal
electronic stores. As these stores may need to carry more stocks of computers
to meet the festive demands, they may turn to other manufacturers and may
not buy from ComTech in the future. This will adversely impact on ComTech’s
future growth and revenue.

 Unfavourable terms of procurement from alternative vendors. ComTech may

be dealing with alternative vendors that they have no previous business
relationship with. Hence, ComTech may not be able to secure business terms
and conditions, including prices, which are as good as those they current enjoy
from Samsung. If ComTech has to pay more for the inventory vis-à-vis Samsung,
their profitability will be adversely affected.
 Sub-standard inventory - If ComTech is dealing with new vendors (the

alternatives) whom they have no prior business relationship with, the product
quality of the components procured may be unknown. ComTech will therefore
need to increase its level of quality checks on the components procured to
ensure that the quality of their end-products is not being compromised. Should
end-product quality be compromised, this will have an adverse effect on
ComTech’s brand.
 Liquidated damages - If ComTech is unable to deliver the contracted number

of PCs to the two government agencies, it may suffer a financial loss in the
form of liquidated damages imposed by these agencies. Should the liquidated
damages be significant, ComTech may be exposed to financial difficulties.
 Loss of future government contracts - If ComTech is unable to meet their

delivery timelines, they may be blacklisted by the government agencies and
prohibited to bid for future contracts. This will adversely affect ComTech’s
reputation as well as losing a major customer.
 Loss of market share - To fulfil the government contracts and avoid liquidated
damages, ComTech may have to resort to recalling laptops from their loyal
groups of electronic stores which are actually their customers. As this incident
has occurred close to the year-end festive seasons, it may have an adverse impact
on the business of these customers. They may decide to stop buying from
ComTech, leaving it with a loss of market share.

(c)(ii) Identify THREE factors that have contributed to the crisis in ComTech, AND the
corresponding mitigating measures that management should take to become more
resilient in a similar crisis in the future. (12 marks)
Factors:
 Supply chain management: currently ComTech only buys the computer
components from Samsung in Korea and Toshiba in Thailand. The inventory
purchased from these 2 companies are however different. There is a strong
concentration risk over the procurement of inventory solely from Samsung and
Toshiba and ComTech needs to consider diversifying their suppliers. Even if
ComTech chooses to buy only from Samsung and Toshiba, it should review the
possibility of buying from Samsung’s and Toshiba’s subsidiaries in different
countries. The severe flooding that occurred in Thailand during 2011 had caused
massive disruption to the supply chain of Japanese companies. There is a lesson
to learn from this incident as Thailand today remains exposed to the risk of severe
flooding.
 Inventory management: Presently, the component inventory held is only

sufficient for one month of production. This was a conscious business decision
taken 5 years to contain holding costs and avoid the risk of stock
obsolescence. Given that ComTech sales volume has increased with additional
IT stores accepted annually, online ad hoc orders and new government contract,
managements need to assess whether a one-month inventory level is still
appropriate.
 Crisis management: The crisis management committee was only formed 2

weeks after the crisis broke out. This is not timely and demonstrates a failure
of prompt escalation of a significant event on the part of the inventory manager
and also of management to the board. In addition, the CEO had to organize a
crisis management committee. This shows that ComTech lacks a crisis risk
management framework and one needs to be developed quickly. This
framework should importantly define what qualifies as a crisis situation, its
escalation process and other critical responses. The board should also

determine what are the significant events happening in ComTech that they
should be notified of immediately.
 Leave cover for key management personnel: When the crisis happened, the
Supply Chain Manager was on overseas vacation and not contactable. This
impacted adversely on ComTech being able to draw on the expertise and
knowledge of the Manager concerned, particularly in assessing the relevant
risks during a crisis. As part of crisis risk management readiness, ComTech
needs to develop a good leave cover plan to ensure that when key management
personnel is absent, it is clear as to who deputises him in addition to the ability
to reach/contact that key manager whose expertise may need to be drawn on
during an emergency situation.

Question 3 – (a), (b), (c), (d) and (e) (Total: 30 marks)

(a) Determine an appropriate discount rate which ComTech can use to evaluate the
sale of its microchip manufacturing subsidiary. Present your answer to the nearest
whole percentage. (8 marks)
Step 1: Ungeared similar micro chip manufacturing company
ßg = ßu [1 + (1 – t) VD/VE]
1.5 = ßu [1 + (1 – 0.17) x 120/540], therefore, ßu = 1.5/1.1844 = 1.266
This is the ungeared beta and represents business risk of microchip manufacture
without the financial risk from ComTech’s debt finance.
Step 2: Regear the asset beta to ComTech’s level of gearing to reflect the actual
level of financial risk accepted by ComTech investors
VE = 60m shares x $S2.50 per share = S$150m
VD = S$60m x 105/100 = S$63m
ßg = ßu [1 + (1 – t) VD/VE]
ßg = 1.266 [1 + (1 – 0.17) 63/150] = 1.707
Step 3: Calculate the cost of equity using CAPM
Ke = Rf + ßu (Rm – Rf)
Ku = 3.5 + 1.707 (8.5 – 3.5) = 12.04 (say, approximately 12%)

Step 4: Calculate the after-tax cost of debt (Kd) by linear interpolation.
Year Cash Discount PV Discount PV

flow factor 5% factor
10%
S$ S$ S$
0 Market value (105) 1.000 (105) 1.000 (105)
1–6 Interest 7 5.076 35.53 4.355 30.48
6 Redemption 100 0.746 74.60 0.564 56.40
5.13 (18.12)
Before-tax cost of debt = 5% + 5.13⁄(5.13 + 18.12) x (10% – 5%) = 6.1%
After-tax cost of debt = 6.1% (1- 0.17) = 5.07%
Alternative solution for Candidates using excel IRR function
T0 T1 T2 T3 T4 T5 T6
(105.0) 7 7 7 7 7 107
Before-tax cost of debt = 5.98%
After-tax cost of debt = 5.06%
Step 5: Determine the WACC to be used to value the divestment of the

microchip manufacturing plant
VE %= 150 / (150+63) = 70.4%
VD %= 63 / (150+63) = 29.6%
WACC = VE % x Ke + VD % x Kd
WACC = 70.4 % x 12.04% + 29.6 % x 5.07% = 9.977% say, 10%

(b) Discuss any TWO considerations concerning the use of the capital asset pricing
model (CAPM) to determine the discount rate in part (a). (2 marks)
Considerations
Diversification
Under the CAPM, the return required from a security is related to its systematic risk
rather than its total risk. Only the risks that cannot be eliminated by diversification are
relevant. The assumption is that investors will hold a fully diversified portfolio and
therefore deal with the unsystematic risk themselves. However, in practice, markets
are not totally efficient and investors do not all hold fully diversified portfolios. This
means that total risk is relevant to investment decisions so the relevance of the CAPM
may be limited.
Market return (Rm)

In practice, it is difficult to determine the market return (Rm). Expected rather than
historical market returns should be used, although historical market returns are used
in practice.
Risk-free rate
It is similarly difficult to determine the risk-free rate. A risk-free investment might be a
government security; however, interest rates vary with the term of the debt.
Risk aversion
Shareholders are risk- averse, and therefore demand higher returns in compensation
for increased levels of risk above the CAPM estimate.
Beta factors
Beta factors based on historical data may be a poor basis for future decision making,
since evidence suggests that beta values fluctuate over time and here we assume the
beta is constant over the life of the asset being valued.

Unusual circumstances
CAPM does not take into account seasonality in a company’s revenues and costs, and
other rises or dips in demand due to unforeseen circumstances that appear to
influence returns on shares.

(c) From the selling company perspective, compute the enterprise value of ComTech’s
microchip manufacturing subsidiary, using the free cash flow valuation method and
year-end discount factors, to establish a minimum selling price and comment on
why this is a minimum value. Ignore acquisition synergy and present your answer
to the nearest million Singapore dollars. (8 marks)
Current Year 1 Year Year Year Year 5

2 3 4 and
onwards
S$m S$m S$m S$m S$m S$m
Revenue (5% growth) 47.6 50.0 52.5 55.1 57.9
Cost of sales (3% (12.4) (12.8) (13.2) (13.5) (14.0)
inflation)
Overheads (zero (20.0) (20.0) (20.0) (20.0) (20.0)
inflation)
Operating profit 15.2 17.2 19.3 21.6 23.9
Corporate tax at 17% (2.6) (2.9) (3.3) (3.7) (4.1)
Profit after tax S$m 12.6 14.3 16.0 17.9 19.8
Perpetuity year 5 198.0
onwards (W1)
Total free cash flows 14.3 16.0 17.9 19.8 198.0
S$m
Year-end discount factor 0.909 0.826 0.751 0.683 0.683
10% (Refer to note
below)
Present value 13.0 13.3 13.4 13.5 135.2
Valuation 188.4
(W1) 19.8/0.1 = 198.0
Value of microchip subsidiary at 10%= S$188.4 million = S$188 million to nearest

million.
The enterprise value of S$188m is considered the minimum value as this is what the
company is currently worth to ComTech as it ignores any potential benefits of using

the spare manufacturing capacity and other synergies which would add extra value to
a potential acquiring company.
(d) From the acquiring company’s perspective, determine a maximum enterprise value
of its subsidiary by including revenue, cost and financial risk synergies which will
assist ComTech in its negotiations with IndScan to divest the microchip
manufacturing division. Comment on why the maximum enterprise value may not
be realised on sale. Use the free cash flow valuation method and year-end discount
factors for your computation. Present your answer to the nearest million Singapore
dollars. (8 marks)
An acquiring company will often pay more for a company than it is worth to the seller,
as the acquirer can add value following the acquisition through:
1. Financial synergy: Reducing the required investor rate of return as the acquisition
results in an overall decrease in financial risk perceived by stock market investors.
2. Revenue synergy: Further revenue growth by accessing acquired markets with

its existing products, or by selling newly acquired products to its existing markets.
3. Cost synergy: Reducing the cost base due to the implementation of new
technologies, management, processes or economies of scale.
 Impact of a decrease in financial risk.
Here, the cost of equity of IndScan is calculated using CAPM and applied to the
microchip manufacturing subsidiary free cash-flows.
Ke = Rf + ßu (Rm – Rf) = 3.5 + 1.1 (8.5 – 3.5) = 9%
The cost of equity of 9% is the required rate of return as IndScan is currently

ungeared. This is now applied to the free cash flows of ComTech’s manufacturing
subsidiary to determine its revised value, as follows:

Financial Risk Synergy Year 1 Year 2 Year 3 Year 4 Year 5 and

onwards
Revised value at 9% S$m S$m S$m S$m S$m
Total free cash flows from part (c) 14.3 16.0 17.9 19.8
Perpetuity year 5 onwards (W1) 220.4
Year-end discount factor 9% 0.917 0.842 0.772 0.708 0.708
(Refer to note below)
Present Value 13.1 13.5 13.8 14.1 156.2
Value of microchip subsidiary at 9% S$210.6m
(W1) Value of perpetuity: 19.8/0.09 = 220.4
 Impact of revenue and cost synergy

Here, the predicted annual additional revenues and cost savings are valued over the
same timeframe, using the 9% required rate to return to determine the value derived
by the acquirer from expected synergies.
Revenue and cost synergy Year 1 Year 2 Year 3 Year 4 Year 5

and
onwards
S$m S$m S$m S$m S$m
Additional gross profit 7.0 7.7 8.5 9.3
Overhead savings 5.0 5.0 5.0 5.0
Net increase in operating profit 12.0 12.7 13.5 14.3
Corporate tax at 17% (2.0) (2.2) (2.3) (2.4)
Additional Profit after tax 10.0 10.5 11.2 11.9
Perpetuity year 5 and onwards (W2) 132
Year-end discount factor 9% 0.917 0.842 0.772 0.708 0.708

(Refer to note below)
Present Value 9.1 8.9 8.6 8.4 93.5
Value of revenue and cost synergy S$128.6m
(W2) Value of perpetuity: 11.9/0.09 = 132
The maximum value the acquirers may be willing to pay will include the financial,
revenue and cost synergies of S$210.6m + S$128.6m = S$339.2 million = S$339
million to nearest million.
Conclusion
This maximum value of S$339 million depends on estimated synergy being realised
and the validity of growth and perpetuity assumptions made. It is likely these
assumptions have overvalued the synergy. It is likely IndScan will not want to pay
more than a typical acquisition premium of between 20-30% in addition to ComTech’s
valuation.
However, it is helpful for ComTech to understand the range of possible values from a
minimum of S$188.7m to a maximum of S$339m which will strengthen its position in
the price negotiations.
(e) Evaluate the advantages and disadvantages of divesting the microchip

manufacturing subsidiary. (4 marks)
Advantages
Focus on growth and competitive advantage
ComTech designs its products, manufactures the microchips, assembles the products
and is responsible for customer sales, marketing and after-sales service. This broad
range of activities may dilute ComTech’s ability to maintain a strategic focus on
sustaining competitive advantage, product innovation and market growth. This
divestment effectively outsources the manufacturing of microchips, removing the cost
of maintaining excessive spare production capacity which ComTech cannot use,

freeing up management time which can be redirected to pursuing product innovation

and revenue growth.
Supplier efficiencies and innovation
The manufacture of microchips will now be ordered from a larger supplier company
who can apply economies of scale and production efficiencies. This may reduce the
cost of microchips to ComTech if some of these production savings are passed on by
IndScan. This may allow ComTech to be more competitive in overseas markets, such
as Malaysia and India, where price competition is stronger and the price point for
electronic products is lower. Additionally, IndScan is involved in the manufacturing of
high-performance industrial computing products, and may be willing to share its own
microchip research and development with ComTech through a strategic collaboration
creating new generations of high performing ComTech microchips.
Disadvantages
Loss of control
Currently, ComTech is able to control the production quality, quantity, timing and
specification of its microchips which are the most complex and vital component of its
range of laptops and desktops. A shift to outsourcing this manufacture of microchips
risks introducing unreliability in microchip performance or supply. This may disrupt
customers’ orders and could result in additional product failures which could affect
consumer trust and brand reputation. Additionally, IndScan may actually increase the
price of supply which may force ComTech to accept lower profit margins or increase
its product prices, which may affect its ability to maintain its market share in Singapore,
or compete in new markets such as Malaysia and India.
Potential loss of microchip supply
IndScan has no obligation to continue to supply ComTech with microchips and even if
this was a condition of sale, the commitment is likely to be time constrained. As
IndScan grows, it may make more commercial sense to use its microchip production
capacity to manufacture its own products or for other companies where the profit
margin is higher. ComTech may need to find another microchip supplier which is
unlikely to be easy or where the cost of supply is more expensive putting the
commercial viability of its computer products at risk.


(a) Using the THREE methods of valuation requested by the directors of ComTech,
provide a summary of the range of possible valuations of TechEase for both a
100% acquisition and a 75% acquisition. You are required to use year-end discount
factors, where applicable. Present your answers to the nearest thousand
Singapore dollars. (11 marks)
Net asset valuation

However, this value excludes one of TechEase’s main assets, its intellectual
property and brand value in TabEase. One way of estimating this is to use industry
information on return on total assets and apply it to TechEase’s earnings before
taxation.
Before tax return that an average entity would earn from S$299,000 tangible assets =
15% × S$299,000 = S$44,850
Before tax premium attributable to intangible assets = (S$85,000 – S$44,850) =

S$40,150
After-tax premium attributable to intangible assets = S$40,150 x (1 - 17%) = S$33,324
Now valuing this premium as a perpetuity at the required rate of return will approximate
the value of the TabEase intellectual property and brand value.
PV of premium = S$33,324 / 0.2 = S$166,620
Therefore, the net asset value, including intellectual capital value, is 142,000 +
166,620 = S$308,620 = $S309,000 to nearest one thousand Singapore dollars.

Future maintainable earnings valuation

The telecommunications average P/E ratio is 18. However, as TechEase is not listed
then a 1/2 to 2/3 adjustment factor is required as TechEase doesn’t possess the
advantages or company size of being listed.
A P/E ratio of 18 x 2/3 = 12 is now applied to TechEase's actual 20x4 after tax
earnings and to its forecast 20x4 results. Further, a 30% premium has been added
representing TechEase’s expected growth potential.
20x3 20x4
S$’000 S$’000
Profit after tax 71 85
Apply P/E ratio x adjustment x 18 x 2/3 852 1,020
earnings
TechEase 30% premium due to x 1.3 1,107.6 1,326
high growth potential
Using this method, the value of TechEase can be approximated between S$1,108,000
and S$1,326,000.
Alternative solution if Candidates use one half as the adjustment factor

A P/E ratio of 18 x 0.5 = 9 is now applied to TechEase's actual 20x3 after tax earnings
and to its forecast 20x4 results. Further, a 30% premium has been added
representing TechEase’s expected growth potential.
20x3 20x4
S$’000 S$’000
Profit after tax 71 85
Apply P/E ratio x adjustment x earnings 18 x 0.5 639 765
TechEase 30% premium due to high x 1.3 830.7 994.5

growth potential
Using this method, the value of TechEase can be approximated between S$830,700
and S$994,000.

Note to Candidates: To accept reasonable adjustment factor between 1/2 to 2/3.
Present value of free cash flows valuation

A start up is challenging to value as low profitability in the early years can undervalue
the growth potential expected in later years. This can be addressed by applying the
applicable estimated growth rate using a perpetuity approach to each revenue and
cost stream.
The perpetuity for each revenue and cost stream from 20x4 onwards will have a
present value at the end of 20x3 of (Forecast Year 1/(Rate – Growth) and therefore
the entity value can be determined as follows using discounted cash flow as follows.
Forecast Estimated Perpetuity working Present

20x4 growth to - Value
S$’000 perpetuity Amount/(Rate – S$’000
Growth)
Revenue 815 8% 815 / (0.20 – 0.08) 6,792
Cost of sales (563) 3% (563) / (0.20 – 0.03) (3,312)
Overheads (150) 2% (150) / (0.20 – 0.02) (833)
Value before taxation 2,647
Taxation (450)
Value after taxation Free cash flow valuation 2,197
The present value of free cash flow available to equity is S$2,197,000, stated to the
nearest one thousand Singapore dollars.
Range of values for TechEase

Using different valuation bases, the range of values for TechEase is summarised as
follows:

Value of TechEase 100% 75%

equity equity
valuation valuation
S$’000 S$’000
Value of tangible net assets S$142 S$107
Value of net assets including intellectual S$309 S$231
capital
CFME valuation based on current earnings S$1,108 S$831
FME valuation based on forecast earnings S$1,326 S$995
Present value of free cash flows S$2,197 S$1,648
Note to Candidates: If one half adjustment factor is used, the values are S$913,000
and S$684,000.
(b) Explain the results of the valuations from part (a) and recommend, with
justifications, a suitable price to commence negotiations. (3 marks)
The net asset valuation is useful to understand the minimum acceptable value as
this represents the cash which would be realised if the assets were sold separately,
however, the trading value is likely to be higher due to growth potential.
The future maintainable earnings valuation provides a quick and simple estimate
of value based on similar companies in the same market, however this value
provides only as an initial indication of its trading value.
This free cashflow valuation assumes the predicted profit forecast is a reasonable
estimate of future free cash flows and that capital investment each year is equal to
the depreciation charge included in overheads. This valuation is only a simply
estimate so further detailed forecasting will be required to improve the reliability
of this valuation.

The present value of free cash flows is likely to overstate value of TechEase due
to the growth to perpetuity assumption. The valuation will need to be confirmed by
due diligence on detailed forecast revenue and costs streams.
In practice, all business values are subject to negotiation, and the figures
calculated are only guides for the directors of ComTech as a start point for
negotiation and due diligence procedures.
If ComTech acquires only 75% of the equity then it will have a controlling stake,
however, it will have to recognise the influence of minority stakeholders. Therefore,
as ComTech will not have full 100% control it is advised that ComTech should pay
less than the 75% value indicated above to reflect less control than 100% ownership.
(c) Discuss the relative merits and drawbacks of the three methods of valuation.
(6 marks)
Tangible net assets valuation
The value of tangible net assets gives a minimum value for the business and
represents the cash that could be raised if the business was wound up, tangible
assets sold and cash collected and paid out to creditors. As such, it is only
relevant to TechEase's value to the extent that it shows investors this minimum value
in the event of a severe downturn in business.
The asset value including intellectual capital is higher than that of the tangible net
assets alone as much of the value is within technology patent rights and the TabEase
brand. The addition of the intangible value in intellectual property and brand
provides an estimated value if ComTech preferred to purchase technology rights
to develop its own tablet, rather than buy the company and continue to market the
TabEase tablet.

Future maintainable earnings valuation
The most popular method for making a going concern valuation is to multiply
estimated equity earnings by an agreed price/earnings ratio. For TechEase, this
gives a wide range of possible values, depending on the estimates of earnings and on
the P/E ratio used.
The method makes only simple adjustments for key valuation factors, such as
expected growth rate, business risk and financial risk, listed or unlisted status. The
purpose of this valuation is to provide a benchmark against quoted market values
and therefore, is a useful start point for negotiations. However, as a valuation method,
it is crude and unrealisable.
Free cash flow valuation
Using a discount rate representing the required rate of return, creates a valuation
which estimates the maximum price that investors would pay for the company,
given the level of perceived risk. The free cash flow method attempts to compute
the present value of cash available to equity often using profit in place of cash flow
and making unlikely assumptions about depreciation and capital expenditure and cash
flows continuing to grow into perpetuity.
Therefore, simple assumptions reduce the reliability of the method so this is

helpful in negotiations to understand the upper price limit. In practice, the method
would be carried out more rigorously as part of a due diligence process with detailed
line by line forecasts and with capital expenditure budgets specifically examined.
END OF PAPER
Section 6
Common Examination Verbs
To assist Candidates to best formulate their answers they will be given the following
list of common verbs and their descriptions.
As an aspiring Chartered Accountant of Singapore, you must be able to

communicate clearly, concisely, and professionally in order to work effectively with
others.
Apart from testing your technical ability, the Singapore CA Qualification

examinations are also assessing your communication skills, in particular, your
ability to frame your answers using language that is clear to a layperson.
Obviously, when marking the answer scripts, markers are looking for accurate
answers that are focused on the question asked, but they are also looking for
answers that convey information in a way that others can easily understand and
that show a deep appreciation for any ethical and professional issues posed.
The following list of commonly used verbs ("action" words) will help you identify
what the examiner expects from your answer and how you can maximise your
marks. You will see that some of these verbs are quite similar and some are even
interchangeable. The irony is that most questions in an examination paper will not
contain a question mark, so you have to be able to determine what the examiner
wants by picking out the verb in the instruction.
Account Account requires you to show how to record an element in the

financial statements appropriately. This might be by means of a
journal entry, T-account, or an extract from the financial
statements. Remember, a journal or a T-account is only
complete if it shows the date of the entry, the correct accounts,
the correct amounts, and has a description (narration) - easy
marks are often thrown away through carelessness.
Advise / Give As a Chartered Accountant of Singapore, your work will invariably
advice require you to form an opinion about the most appropriate course
of action, or offer alternative courses of action depending upon
the situation. This type of question requires you to give specific
guidance to an individual or a group (e.g. a taxpayer, audit client,
management, etc.), so your answer must provide specific
information or make a recommendation tailored to the individual
or group.

Analyse Identify the key components, look for similarities and differences,
look for patterns or outliers, and weight up the issues. If there is
numerical data, you might need to provide a range of answers
depending on how you substitute the data into your model. Make
sure you state any implications of your answer and any
assumptions that you make.
Apply This instruction requires you to relate your answer back to a
specific document/s or set of facts. Alternatively, you may be
required to use a specific formulae, model, or process. For
instance, "Apply the relevant Singapore Financial Accounting
Standard to …". Another example would be "Apply the rules for
recording and reporting foreign currency transactions …". Apply
and With reference to are similar.
Appraise Make a judgment about the value, quality, outcomes, results, or
size. Often there will be a qualifier in the instruction, which will
tell you exactly what to appraise. For instance, "Appraise
Company X's credit worthiness …". Professional scepticism and
professional judgment are called for when making an appraisal.
Appraise and Assess are interchangeable.
Assess Make a judgment about the value, quality, outcomes, results, or
size. Often there will be a qualifier in the instruction, which will
tell you exactly what to assess. For instance, "Assess the
adequacy of the disclosures in the financial statements relating
to …". Professional scepticism and professional judgment are
called for when making an assessment. Appraise and Assess
are interchangeable.
Bullet points Unless specifically asked for, only use bullet points in your
answer as an absolute last resort if you are running out of time.
A quarter of a mark is better than zero.
Calculate / Do the number crunching and derive the correct answer. Make
Compute sure that you write down your workings and crosscheck your
numbers.
Comment Comment is similar to evaluate in that you are required to make
a judgment or provide your opinion based on the facts at hand.
Professional scepticism and professional judgment are called for
when commenting.
Compare and Compare requires you to show how things are similar and/or
Contrast different while contrast requires you to show how things are
different or opposite. Even if you are asked just to compare, you
must indicate both the similarities and differences.
Critically Critically requires that your answer be more extensive than if
(analyse / you were asked to analyse or evaluate the data. Your answer
evaluate) must add a greater degree or level of accuracy, depth,

knowledge, understanding, logic, questioning, reflection, and

quality to your analysis or evaluation.
Remember, critically requires you to consider both the positive

and negative points and apply professional scepticism (a
questioning mind) in conjunction with professional judgment.
Often when an examiner asks you to critically evaluate or
analyse something it is because there can be more than one
right answer, so you have to convincingly defend your opinion as
part of your answer.
Define Like list, you are most unlikely to ever be asked just to define a
term, particularly in an open-book examination unless it is a term
that requires you to communicate your understanding rather than
copying down someone else's definition. For instance, "Define
in your own words …".
Demonstrate Demonstrate requires you to prove or disprove something
beyond any doubt, or show that it applies in the situation
described by giving evidence (for instance, provide an example).
The evidence can be from the facts given or from your general
knowledge and experience. Demonstrate and Illustrate are
similar.
Describe Describe requires you to provide the characteristics and features
of an item or situation. For instance, "Describe the audit
procedures to verify …" requires you to state the specific audit
procedure/s that you would use without going into step-by-step
detail of how to perform that procedure.
Detail Detail requires you to give very specific instructions or advice.
For instance, "Detail the audit procedures to verify ..." requires
you to provide step-by-step instructions. Another example is
"Detail how the findings from the site visit will affect the planning
of the statutory audit". This instruction requires you to state the
positive and negative consequences in relation to the site visit
and the planning of the audit. Don't forget to think about the
future and the past, not just the present when stating the
consequences.
Discuss Discuss requires you to provide the for and against arguments,
you cannot have a discussion without opposing views otherwise
it would be just a conversation. If discuss is placed near the
front of the instruction, then it requires you to provide an answer
that is similar to explain, but addresses the for and against
arguments. For instance, "Discuss why numerical valuation is
essential when buying or selling a small business".
However, if there is a statement and discuss is placed at the

end, your answer must be in the form of an essay with the
following elements:

 An introduction, which declares whether you agree,

disagree, partly agree, or partly disagree with the
statement;
 The body of your answer, stating: i) Why it is possible to
agree and ii) why it is possible to disagree with the
statement. You should provide examples to support both
points of view; and
 A conclusion that proves your original position.
An example of a discuss question that requires an essay style

answer would be "Numerical valuation is not essential when
buying or selling a small business because the actual selling
price is the outcome of negotiation. Discuss".
Distinguish To note differences between. For instance, "Describe what is
meant by the term tax planning and distinguish it from tax
evasion". Apart from describing what tax planning involves (1-2
marks max), you need to explain how the two terms are different
and how they are similar. However, providing a list of differences
and similarities is insufficient - complete sentences are essential.
In addition, it is important that you also mention any other
relevant factors (e.g. the ethical and legal issues).
Evaluate Pass judgment on or provide your opinion based on the facts at
hand. When making an evaluation, there are often
predetermined criteria that you will use to base your opinion on.
The key here is to give your opinion or make a judgment of the
facts, but providing just a description of the facts is insufficient.
when making an evaluation. Examine and Evaluate are
interchangeable.
Explain As a Chartered Accountant of Singapore, you will be frequently
called upon in your work to explain difficult concepts and
technical issues to people who are not accounting trained. This
is where your ability to share your knowledge using simple
everyday terms will be most needed.
Explain requires you to write at least several sentences

conveying how you have analysed and synthesised the
information in a way that a layperson can easily understand the
concept or grasp the technical issue at hand. For instance,
"Explain whether an 'emphasis of matter' paragraph or an 'other
matter' paragraph would be most appropriate in this instance", or
"Explain how a partnership is assessed for tax".
Examine Pass judgment on or provide your opinion based on the facts at
hand. When examining the facts given, there are often
predetermined criteria that you will use to base your opinion on.

The key here is to give your opinion or make a judgment of the

facts, but providing just a description of the facts is insufficient.
when making an evaluation. Examine and Evaluate are
interchangeable.
Identify Identify is similar to list, but requires you to also provide an
explanation as to why the item that you have identified is
relevant to the facts given in the question.
Often identify will require you to select a specific issue or issues,
but not all issues, so you need to look out for any qualifying
words. For instance, "Identify the Board Matters …" is asking
you to focus solely on issues that relate to Board Matters so if
you digress and identify remuneration issues, you will not score
well. Another example is "Identify the companies that qualify as
members of the group for the purposes of group tax relief". In
order to score well in this second example, you need to identify
the companies and state why they are included in the group. You
also need to state if a company is not included and why.
Justify Whenever you see the word justify you must provide reasons for
your answer, in other words, provide support for your argument
or conclusion. If you fail to justify your answer, you will lose
valuable marks.
Illustrate / Give Illustrate requires you to provide an example, either from the
examples facts given, a real-life example or a made up example to
illustrate the point you are trying to make. Illustrate and
Demonstrate have similarities.
List Prepare an itemised list. Although you are unlikely to ever be
asked just for a list of items, it is important to remember that
many of the common verbs used by examiners require you to
begin with a mental list of issues to address.
Outline Outline requires you to provide a general overview of the
situation and indicate the main features. Outline is used when
the question is worth only a couple of marks, but a single
sentence is usually never enough to achieve full marks.
Prepare Prepare requires you to produce your answer using a specific
format. For instance, "Prepare the Statement of Cash Flows for
…" or "Prepare all the relevant journals …". Remember, a
journal is only complete if it shows the date of the entry, the
correct accounts, the correct amounts, and has a description
(narration) - easy marks are often thrown away through
carelessness.
Propose Put forward (for example, a point of view, idea, argument,
alternatives, etc.) for consideration or action. For instance,
"Based on the facts of the case, propose the most tax-effective
vehicle …", or "Propose audit adjusting entries to correct …".

Quantify Provide a numerical value (an exact calculation) or a range of

values (upper/lower limits, average, likely values, etc.). For
instance, "Quantify the misstatement in the 'investment in
subsidiary' in the Statement of Financial Position". As with
calculate and compute, you should always show your workings
and crosscheck your numbers.
Record Record is similar to prepare in that you may need to perform a
calculation and show the specific components in an appropriate
format. For instance, "Record the fair value gain/loss and
indicate if the gain/loss is recognised as profit or loss or other
comprehensive income".
Recognise Recognise requires you to distinguish between various
components and to be able to state how each component should
be treated. For instance, "… and indicate if the gain/loss is
recognised as profit or loss or other comprehensive income".
Identify and Recognise have similarities.
Recommend Make a statement about the most appropriate course of action.
If there is more than one possible course of action, state which
action you would choose and why (justify your choice). Your
professional judgment and your ability to analyse and synthesis
the wider situation are critical to scoring well in these types of
questions. Don't forget to think about the future and the past, not
just the present when making a recommendation.
Respond / This is your right of reply. When you are asked to respond, it is
Reply usually in reply to a comment made by someone else (although
you can also be asked how you would respond in a particular
situation). For instance, "Respond to the Chairperson regarding
her comment on impairment". Whenever you are asked to
respond, you must always justify your opinion or the actions you
would take.
Use / Using This instruction tells you the type of model that you must use
when formulating your answer. For instance, "Using the Market
Approach, …".
State State is similar to list, but the items require your professional
judgement. For instance, "State any restrictions that apply". One
of the easiest ways to make sure that you state comprehensively
is to think, "list AND justify". You will note that state appears in
many of the verb descriptions given.
Summarise Provide a concise description. Summarise is similar to
describe, but in a condensed format.
Synthesise Bring together the relevant elements to make a whole.
Synthesis is always required as part of an evaluation.
Synthesis is how you have made sense of (comprehended) the
facts of the case.

To what extent This instruction requires you to advance arguments in favour of

a position or point of view and respond to or take into
consideration the opposing arguments or points of view. You
must always justify your answer.
Translate For the purposes of the Singapore CA Qualification
examinations, translate refers to the conversion of data from one
currency into another currency (although translate can refer to
spoken and written language as well).
With reference This instruction requires you to relate your answer back to a
to specific document/s or set of facts. For instance, "With
reference to relevant Singapore Financial Reporting Standards,
explain the risk of material misstatements relating to …". Failure
to make specific mention of the document/s or facts in your
answer will result in a substantial loss of marks.
END OF EXAMINER’S GUIDE

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BUSINESS

The copyright in this publication is owned by the

All rights reserved. No part of this publication may

© 2019 Singapore Accountancy Commission Page 2 of 57

The Examiner’s Guide

Candidates are advised to approach the Registered Learning Organisations (RLOs)

About the Singapore Accountancy Commission (SAC)

For more information, please visit www.sac.gov.sg

About the Institute of Singapore Chartered Accountants (ISCA)

Established in 1963, ISCA is an advocate of the interests of the profession.

© 2019 Singapore Accountancy Commission Page 3 of 57

ISCA is a member of Chartered Accountants Worldwide, a global family that brings

For more information, please visit www.isca.org.sg

© 2019 Singapore Accountancy Commission Page 4 of 57

Question 1 – (a), (b), and (c) 18 marks

© 2019 Singapore Accountancy Commission Page 5 of 57

Governance & Risk component – Questions 1 and 2 (50 marks)

Question 1 covered corporate governance while Question 2 covered risk

Business Value Component – Questions 3 and 4 (50 marks)

Question 3 tested Candidates on determining a risk adjusted rate of return to

© 2019 Singapore Accountancy Commission Page 6 of 57

© 2019 Singapore Accountancy Commission Page 7 of 57

© 2019 Singapore Accountancy Commission Page 8 of 57

Part (c) required Candidates to demonstrate their general understanding of the

© 2019 Singapore Accountancy Commission Page 9 of 57

Singapore CA Qualification Examination

Business Value, Governance & Risk

© 2019 Singapore Accountancy Commission Page 10 of 57

Company Background Information

© 2019 Singapore Accountancy Commission Page 11 of 57

Question 1 – (a), (b) and (c)

Name Board Role Brief Background Years Age

© 2019 Singapore Accountancy Commission Page 12 of 57

List of Candidates to replace retiring board members

© 2019 Singapore Accountancy Commission Page 13 of 57

1 (a) Critically evaluate whether each of the above candidates is

2 (b) Considering the composition of the Nominating Committee and

3 (c) Comment on TWO aspects of the current board diversity that

© 2019 Singapore Accountancy Commission Page 14 of 57

Question 2 – (a), (b) and (c)

ComTech’s inventory policy is to maintain only one-month of inventory level to save

© 2019 Singapore Accountancy Commission Page 15 of 57

Examplify Question 2 required:

6 (i) From the collapse of Hanjin Shipping, identify FOUR

© 2019 Singapore Accountancy Commission Page 16 of 57

7 (ii) Identify THREE factors that have contributed to the

© 2019 Singapore Accountancy Commission Page 17 of 57

Question 3 – (a), (b), (c), (d) and (e)

ComTech has four operating subsidiaries: retail, online sales, microchip

ComTech is already highly geared as it borrowed a substantial amount to establish

© 2019 Singapore Accountancy Commission Page 18 of 57

ComTech has identified a listed company, IndScan Limited (“IndScan”), which

© 2019 Singapore Accountancy Commission Page 19 of 57

Valuation and potential synergy

© 2019 Singapore Accountancy Commission Page 20 of 57

 No change in overheads is forecasted from current levels;

 Present all valuations at 30 September 20x3 values; and

1. Revenue synergy - IndScan is expected to create at least an additional S$7