UNIVERSITI UTARA MALAYSIA

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SCHOOL OF ACCOUNTANCY
BKAM 3083 PERFORMANCE STRATEGY (GROUP ASSIGNMENT: LONG CASE 1) (B SUPERMARKETS)

PREPARED FOR:DR. ROSLIZA BINTI MAT ZIN

PREPARED BY:NOR AFIDA BINTI RAZALI FATHIN NORSHAFIQAH BINTI ZULKEFLY SITI KHATIJAH BINTI MANAP NORISMARIZA BINTI ZAHARI FAZRIN IQMA BINTI HASSANUDDIN

195569 195574 195783 195806 195843

SUBMISSION DATE:18th NOVEMBER 2012

QUESTION A i. Discuss two ways in which Bs investment in country A could adversely affect the relationship between Bs board and the shareholders of B.

When we invest in a new market that never been think to enter into that market make a suspicious feeling to the shareholders especially when we did not know whether that investments give benefits or cost to us. This is the most important think that the board need to consider which are the wealthy of their shareholder despite of their goals to expands the company for the sustainability. There are some investments that can adversely affects the relationship between Bs board and its shareholders such as different goals or interest between them and also less confidents about their return in the new markets.

First of all, about the interest that have in every boards and shareholder, we know that there are different in term of getting a sustainable business and also in term of wealth. The board might want to expands their business in regards to fulfil the wealth of the shareholders but in the same time the commitment in creating wealth may be difficult to handle and we notice that the shareholder only cared about their return or benefit from the company. There is a possibility that investment in country A cannot fulfil the needs and interest of the shareholder.

Lastly is about the less confident in return on the investment to the new market. In this case, the return on the investment may be cannot be given to the shareholder as Bs supermarket wants to holds and used it in the new market. This is considered as the threats( risk) to the shareholder and it become worst if the shareholders did not want to cooperate with the board for the successful market in country A.

ii.

Evaluate the risk that Bs venture in country A will fail because of cultural differences

The risk of culture differences occurred when Bs supermarket enter new country A where the local customer need to change from local product to other product. Bs target customers have already built up a sense of brand loyalty towards Bs competitors within that market. The customer will be more comfortable to use local product compare from other product. This is because, local committee has a perception that local company will be produce the product that good and suitable for their norm, culture and religious. Global businesses are not always welcomed when they seek to establish themselves in new markets and there are often fears of foreign interference in areas such as treatment of local suppliers and of employees. B risks being viewed as an outsider, particularly when the Chief Executive is determined to have the local market adapt to the companys ways rather than the opposite.

Another important factor will be arising from the range of goods that B sells. The hypermarket will sell various type of product that not all of it will be suitable for the culture and taste of the customers in country A. For example, a foodstuff product could contain an ingredient that is considered unacceptable to customers of a particular religious faith and that could cause a damaging controversy where Asian people majority in Islam religion. This matter will give negative perceptions to the customers and their trust to Bs supermarket and products will be reduces. Misunderstandings can also occur because customers in country A may misunderstand some of the nuances of Bs products. For example, hamburgers and beef burgers are both made out of beef but that is not always recognized because some consumers do not realize that the former term is due to the product being associated with the German city of Hamburg.

QUESTION B

i.

Evaluate the risks for B arising from interest rate fluctuations.

When incurred interest rate fluctuations, B might arise some risks especially in gearing and its revenues. The fluctuation might affect both terms because when interest rate increase, the gearing ratio might increase too because the gearing will influence by the cost of borrowing. The higher value of loans the greater the exposure to changes in interest rate. The gearing ratio right now is 40% (15 744/ (24019 + 15744). The percentage show that B right now having high gearing and if the interest rate increase, it is gearing ratio will become higher and will affect to their revenue. Their revenue might decrease because high interest expense that they need to pays because of their long term borrowing. The interest expense will influenced Bs profit because in income statement the expense will be deduct as a finance cost to get profit for the year. When finance cost increase, B will gain less profit and for the year the finance cost for the company is 14% (852/6211) of net operating profit. If the interest rate increase, the finance cost also will increase and Bs profit will decrease. When their profit decrease, it difficult for B to running their business. This is because their financial to overcome their operating cost is limited and they not afford to expand their business as what they have planned.

Then, their customer demand might be affected by the fluctuation in interest rate. When the interest rate rising, the purchase power among their customer will reduce and they want to avoid paying more but gaining less. In that situation, they mostly preferred to save their money rather than keep buying. When the customer less buying B cannot sell their product in large quantity and in the end their profit might decrease too.In conclusion, when the interest rate fluctuation rising B need to bear some of consequence and they need to be more careful in this situation to enable they will keep sustain in this industries. 4

ii.

Discuss the potential risks and benefits that could arise from the swap arrangement with the major commercial bank. Your answer should be supported by calculations that show the effects of the swap

a) Assuming that EURIBOR remains constant

If B enter to swap arrangement, B will receive fixed interest rate = 7.2% The variable rate loan = EURIBOR + 3.8% EURIBOR = 1.1% Actual interest rate = 1.1% + 3.8% = 4.9% Effective interest cost = 7.2% - 4.9% = 2.3% and B will pay = 2.3% EUR 7000 million = EUR 161 million

b) Assuming that the rate increases to 2%. If EURIBOR rise as Bs Finance director believe to 2.0%, then new Actual interest rate = 2.0% + 3.8% = 1.4% and B will pay = 1.4% EUR 7000 million = EUR 98 million

The potential risk could arise from this swap arrangement is the interest rate may change in the future. It will affect B in order to pay the interest. Let say fixed rate fall, B will be unable to benefit from the lower rate available in the market because its committed to paying fixed rate.

The benefit could arise is easy to B in forecasting the effect of its interest payment on cash flow and profit because by having fixed interest rate, B would pay a fixed rate of interest.

iii.

Evaluate the Finance Directors statement that there is no point in purchasing a sequence of short term instruments to lower exposure to interest rate risks over the remaining six years of the loan.

By purchasing a sequence of short term instruments is not an efficient strategy for B to mitigate exposure to interest rate risks over the remaining six years of the loan. The exposure to interest rate risks will depend on the amount of interest bearing assets or liabilities that B holds and the types of interest rate which are floating or fixed rate.

Sometimes by purchasing a sequence of short term instruments will gives more opportunity for the company to exposure to interest rate risks. If B puchase a sequence of short term instruments with a fixed rate of interest of 7.2% for the remaining six years and at present EURIBOR is 1.1%. Bs Finance Director believes that the EURIBOR will soon rise to 2.0 %. The affect to the company is B need to bear 2.0 % of the rising interest rate for all their sequence short time instruments. When they need to bear the rising interest rate, it mean their gearing ratio will increase and might increase their opportunity to exposure to interest rate risks. If B has floating rate loan for their sequence of short term instrument, changes in interest rate will alter the amount of interest payables and receivable. This directly affects their cash flows and profits and give higher exposure to interest rate risks. The higher the values of the loans the greater the exposure to interest rate risks. In conclusion we can says the Finance Directors statement is right because when puchasing a sequence short term instrument and the instrument price was expensive because of unpredictable interest rate risk .It was risky for the company to gain high return after six year of the loan.

QUESTION C

i.

Evaluate the potential effectiveness of RFID technology for the identification and prevention of fraud by staff.

The technology will be reducing the problem overstating or understating the count. The manager or inventory manager will be able to check the amount of inventory in the store using the system before conducting the count and comparing computer number with physical count. Their staff can do a fraud by taking goods for personal interest without having a proper report and system. When using a system, the machine will not be able to misreport in this way. When using a manual system, every person can be adjusted the amount will be stated in report about the count will be understated or overstated.

Besides that, B supermarket also can reduce time consuming and labor cost in evaluation and prevention of fraud. When using RFID, they will be easily to access the shortage amount and every transaction will be automatically recorded. The time consuming will be reduce where they can access the system whenever they want without taking a long time in physical time. The labor also can be reducing where they will be no need to use more man force to evaluate the shortage and fraud. By the system, they can access everything. They only needed man force to ensure the reliability of the reported given by calculating physically their inventory.

Lastly, they also will be easier to conduct spot checks frequently in B supermarket. So, their inventory shortages should be recognized immediately. The store manager can count and recount inventory without taking large numbers of staff away from other duties. Their staff will be difficult to make a fraud for their personal interest when having this system in B supermarket.

ii.

Recommend tests that Bs internal audit department could conduct to evaluate the effectiveness of the RFID technology while the pilot programmed is operating.

In order to evaluate the effectiveness of the RFID technology while the pilot programme is operating, internal audit department can compare the physical count with the RFID. If there any different, thats mean this system still have the weaknesses. If not, the system is more effective as compare labour-intensive. If the physical count is not same with the RFID, theft might be happen in the store. So, it is easy to management to trace it.

Besides that, auditor can inquire the opinion of staff and management about the new system for managing inventory. It is convenience for them or not. If okay, thats means the system is effective in their operation. If not, audit staff may find out what are the factors that contribute to that feel.

In addition, internal audit department also can perform analytical review to the overall inventory in the B. This for the purpose to check whether the inventory level is sufficient and not passing out the reorder point. If the inventory level reach at reorder point, so it will give sign to the company to reorder the inventory to enable them capture the demand.

Last but least, audit staff himself can recomputed the number of inventory and compare again to the inventory record system. This method can give the trust to auditor himself about the number of inventory. If auditor is not willing to do so, they can observe the counting of inventory in operation that done by staff to ensure they are does not cheat with number of inventory.