Strategic Professional

Strategic Business Leader

SBL – Mock Exam 2 Questions

Time allowed:
4 hours including reading, planning and reflective time
This question paper is an integrated case study with one section
containing a total of 100 marks and ALL Tasks must be
completed.
All Tasks contain Professional Skills marks which are included in
the marks shown above
Do NOT open this paper until instructed by the supervisor.
This question paper must not be removed from the
examination hall.

©2020 ACCA All rights reserved

Introduction
Halcyon Holidays Co (HH) is an established travel business located in a European country which is
outside the Eurozone and uses its own currency (the home country dollar, ‘$’). HH is a private
limited company. All shares are owned by members of the HH board of directors. Danny Boiler, the
founder and chief executive of HH, announced in July 20X8 that he intends to retire on 30 January
20X9 and wishes to sell some of his shares in the company. The board believe this provides an
opportunity for the company to enter a new phase in its development and has requested your advice
on managing the transition.
The following exhibits (1–6) provide information relevant to HH Co:
– Exhibit 1 – Briefing paper from the finance director concerning the proposed Initial Public
Offering (IPO).

– Exhibit 2 – Recruitment agency advertisement providing background information about HH and

an outline person specification for the role of chief executive.

– Exhibit 3 – Summary CVs for two candidates for the chief executive position.

– Exhibit 4 – E-mail from a member of the consultancy team analysing the profitability of holiday
products offered by HH.

– Exhibit 5 – Newspaper article regarding legal action against HH following civil unrest in holiday
resorts.

– Exhibit 6 – Transcript of meeting with HH’s information technology (IT) director.

The case requirements are as follows. You will be told which role you are taking in each task:
1 You are Amrita Foxton, a management consultant advising the board of HH.
It is now November 20X8. The board recently met to discuss plans to expand the business
and to list the company’s shares on the local stock exchange by means of an Initial Public
Offering (IPO) (Exhibit 1). In addition to raising new finance, an IPO would give existing
shareholders (the current directors) the opportunity to realise part, or all, of their
investment. With his retirement imminent, the chief executive is eager to do this. The
board considers $3.40 per share to be a reasonable target price for the IPO.
Required:
Prepare a report to the board which:
(a) Advises whether the target share price of $3.40 is appropriate in the
context of the three equity valuations as at 30 June 20X8. (10 marks)

Professional skills marks are available for demonstrating evaluation skills in

assessing the appropriateness of the target share price (2 marks)
(b) Evaluates the implications of pricing strategies A and B, based on the
offers for shares received by 15 November 20X8, for:

(i) the directors of HH; and

(ii) the new shareholders of HH. (12 marks)

Professional skills marks are available for demonstrating analysis skills in

evaluating the implications of each pricing strategy (2 marks)

(26 marks)

©2020 ACCA All rights reserved SBL Mock 2 Questions 2

2 You are Brent Atkinson, a human resource consultant hired to help HH recruit a new CEO.
It is now December 20X8. The outgoing chief executive, Danny Boiler, is planning his
succession. A person specification was uploaded to the HH Co website and the position was
advertised nationally and internationally (Exhibit 2). Following a review of applications and
initial interviews, two candidates have been shortlisted for final interview (Exhibit 3).
Required:
Draft a letter to Danny Boiler which evaluates the suitability of the two remaining
chief executive candidates and recommends a candidate to succeed Danny.
(10 marks)
Professional skills marks are available for demonstrating scepticism skills in challenging the
suitability of each candidate. (2 marks)
(12 marks)
3 You are Bina Cash, finance director of HH.
It is now February 20X9. A new chief executive, Jenny Diamond, has been appointed and
HH Co has been successfully listed on the stock market. Jenny believes that a more
detailed understanding of the profitability of each type of holiday product should be carried
out before making any decision about future product expansion.
Anna Lane, the Financial Accountant in your finance team, has prepared an analysis of the
revenues, cost of sales and administration costs associated with each of HH’s holiday
products (Exhibit 4).
Required:
Prepare a briefing paper for the new chief executive which discusses how HH
could improve the profitability of each of its three types of holiday product.
(10 marks)
Professional skills marks are available for demonstrating communication skills to inform
the new chief executive of strategies to improve profitability (4 marks)
(14 marks)

©2020 ACCA All rights reserved SBL Mock 2 Questions 3

4 You are Amrita Foxton, a management consultant advising the board of HH.
It is now March 20X9 and HH Co has received a large compensation claim from customers
whose holidays were disrupted by civil unrest. A relevant newspaper article is available in
Exhibit 5.
Required:
Prepare a report to the board which:
(a) Explains why it is difficult for HH to reliably advise its customers on the
threats arising from civil unrest. (8 marks)

Professional skills marks are available for demonstrating commercial acumen

skills in showing awareness of the reasons it is difficult to give reliable advice.
(2 marks)
(b) Recommends procedures that HH should put in place to deal with the
possible outbreak of civil unrest in any of the holiday destinations.
(8 marks)

Professional skills marks are available for demonstrating commercial acumen

skills in making sound recommendations for suitable procedures. (2 marks)
(c) Evaluates the risks for HH arising from the emergence of law firms
offering “no win – no fee” services. (8 marks)

Professional skills marks are available for demonstrating evaluation skills in

assessing the risks posed by “no win – no fee” legal services. (2 marks)
(30 marks)
5 You are William Fish, an IT consultant.
HH’s information technology (IT) director, Clyde Sinclair, is attempting to persuade the
board to upgrade the company’s online booking system. You are helping Clyde to prepare
for the next board meeting, where this issue will again be on the agenda. A transcript of a
recent meeting between yourself and Clyde is available in Exhibit 6.
(a) Draft ONE presentation slide, with accompanying notes, which analyses
the risks to HH arising from the company’s existing online booking
system.
(6 marks)

Professional skills marks are available for demonstrating communication skills in

persuading the board of the risks arising from the existing system. (2 marks)
(b) Prepare notes which analyse the key stages in managing the project to
upgrade HH’s online booking system. (8 marks)

Professional skills marks are available for demonstrating commercial acumen

skills in identifying and analysing the key stages in managing this project.
(2 marks)
(18 marks)

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Exhibit 1 – Briefing paper from the finance director, concerning the proposed IPO
To: Amrita Foxton, Management Consultant
Prepared by: Clinton Crisp, Finance Director of Halcyon Holidays
Date: 22 November 20X8
Subject: Proposed IPO

The existing shareholding structure of the company is as follows:

% holding
Chief executive 52
Finance director 12
Operations director 12
IT director 12
Human resources director 12

The number of shares to be sold by each director in the IPO is as follows:

Chief executive 8 million
Finance director 1 million
Operations director none
IT director 3 million
Human resources director 1 million
In addition, the board has decided to offer a further 10 million new $0.10 shares in HH as part of
the IPO. A total of 23 million shares would therefore be sold under the IPO if the issue is fully
subscribed.
If the IPO is under-subscribed, the sale of shares held by directors would take priority over the
issuing of new shares.
Equity valuation (summary) *
HH’s equity was valued as at 30 June 20X8 using three methods:
Method Value per share
Net assets (excludes intangible assets) $1.13
Price/Earnings (based on P/E ratios of two listed travel agencies) $2.93 – $3.73
Discounted cash flow (DCF) $4.82

* The relevant valuation calculations are included later in this briefing paper.

Target price
The board of HH considered that a reasonable target price per share for the IPO would be $3.40. It
was then agreed that, under the IPO, offers for the purchase of shares should be requested on a
tender basis in the guide price range of $2.90 to $3.60 per share.
Invitation to subscribe
An open invitation to submit offers to subscribe for shares in HH under a tender was published on 1
October 20X8 with a deadline for submission of offers by 15 November 20X8.
Interim results for the quarter ended 30 September 20X8 were published on 20 October 20X8 and
indicated lower growth than had been forecast in the information published at the launch of the
tender. This resulted in a lower than expected demand for the shares.
The tender offers received by the deadline date are summarised below:
Maximum price Number of shares
offered requested at this price
$ per share millions
2.90 4
3.00 3
3.10 2
3.20 3
3.30 3
3.40 6
3.50 5
3.60 4

©2020 ACCA All rights reserved SBL Mock 2 Questions 5

Pricing strategies under consideration
In view of this response, the following two alternative pricing strategies in respect of the IPO are
being considered by the board:
Pricing strategy A: Set the selling price at the original target price of $3.40 per share even
though this will mean that that the offer will be under-subscribed and a lower
amount of finance raised.
Pricing strategy B: Set the selling price at a level at which the issue is fully subscribed.

Equity valuation calculations

Net assets
$m
Book value of net assets 75
Uplift to market values of non-current assets 27
────
Net asset value 102
────
Value per share = $102m ÷ 90m = $1.13

Price/Earnings (P/E)
(based on P/E ratios of two listed travel agencies)
Value of HH Value per share
At P/E of 11 11 × $24 m = $264m $2.93
At P/E of 14 14 × $24 m = $336m $3.73

Discounted Cash Flow (DCF)

$m
Profit after tax 24
Add back depreciation 3
Capital expenditure (on-going requirement) (5)
───
Cash flow for year ended 30 June 20X8 22
───
HH’s cost of capital is 9.60%
The calculation below is based on an immediate one-off investment of $50m and assumes annual
cash flow growth of 3% for two years, then 5% to perpetuity.
Note that cash flows have historically grown at 2% per annum.
DCF calculation:

30 June 30 June 20X9 30 June 20Y0 30 June 20Y1 to

20X8 $m $m perpetuity
$m $m
Cash flow (50.00) 22.66 23.34
= 22 × (1 + 3%) = 22.66 × (1 + 3%)
Cash flow in (23.34 × 1.05) ÷
perpetuity (0.096 – 0.05)
= 532.76
Discount at 9.6% 1.000 0.9124 0.8324 0.8324
PV (50.00) 20.67 19.43 443.47

Total NPV: $433.6 million

Value per share = $433.6m ÷ 90m = $4.82

©2020 ACCA All rights reserved SBL Mock 2 Questions 6

Exhibit 2 – Recruitment agency advertisement

Vacancy – Chief Executive Officer

Executive Search International is delighted to announce an exciting opportunity to lead a well-
known travel business into the next phase of its development.
About the Company
Halcyon Holidays Co (HH) is a private limited company founded over four decades ago. It has a
network of 50 branches throughout its home country. Most of the the company’s revenue now
comes from online bookings through the HH website.
Outline Person Specification
Experience:
1. Consistent achievement at executive level in a stock market listed company.
2. A proven track record of leading and delivering corporate vision.
3. A proven track record of successfully implementing cultural change.
4. Experience of building professional credibility with boards, employees, investors and the media.
Knowledge, skills and abilities:
1. A comprehensive understanding of the travel industry.
2. Well-developed leadership skills which promote a positive organisational culture.
3. An ability to develop strong relationships with all stakeholders.
4. Financial and commercial awareness, with strong analysis and problem-solving skills.

Personal qualities:
1. An ability to deliver under pressure.
2. Values the contributions of others.
3. A strong commitment to continuous improvement.
4. Results focused and performance driven.

©2020 ACCA All rights reserved SBL Mock 2 Questions 7

Exhibit 3 – Summary CVs for two candidates for the chief executive position
Summarised CV – Candidate A
PROFESSIONAL EXPERIENCE
– Chief executive of Value Vacations, the largest travel business in Jayland. 2009–present
– Chief executive of Burger Queen, a multinational fast food company. 2000–2009.

EXPERIENCE and DUTIES

– Developing strategy and mission and delivering it.
– Driving human talent development.
– Working on several complex infrastructure projects.
– Close liaison with stakeholders.
– Producing well-organised presentations for senior management.
– Successfully managing the IPO of Value Vacations in 20X3.

KEY SKILLS and COMPETENCIES

– Ensuring the highest possible professional standards with a focus on strong internal control.
– A charismatic leader with a proven track record in managing the cultural change from a private
company to a public listed company.
– A creative thinker, with exceptional financial acumen.

Summarised CV – Candidate B
PROFESSIONAL EXPERIENCE
– Chief executive of Rose Boyce, the world’s third largest aircraft engine manufacturer, based in
Ceeland. 2007–present
– Finance director of Terrific Travel, a travel agency in Ceeland. 2004–2007

EXPERIENCE and DUTIES:

– Setting strategic business objectives
– Implementing systems to monitor performance against KPIs.
– Driving revenue growth and increased operational efficiency.
– Identifying skills gaps and providing advice on hiring strategies.
– Reviewing, monitoring and authorisation of all budget expenditure.
– Motivating and providing strong leadership.

KEY SKILLS and COMPETENCIES

– Decisive and forward thinking.
– Ability to network and liaise with stakeholders at every level.
– Ability to manage projects in a complex environment.
– A proven track record of successful leadership within highly competitive markets.
– Highly effective interpersonal skills.
– Operationally strong, financially aware and commercially astute.

©2020 ACCA All rights reserved SBL Mock 2 Questions 8

Exhibit 4 – E-mail from a member of the consultancy team analysing the profitability of HH’s
holiday products

From: Anna Lane Sent: Fri 15/02/20X9 12:19

To: Bina Cash
Subject: Analysis of profitability HH Co’s holiday types
Attached: HH.xls

Dear Bina
Please find attached my analysis of the relative profitability of HH’s three holiday types. The source
data (relating to the year ended 30 June 20X8) was provided by our management accountant. I
then used activity-based costing (ABC) to apportion administration costs across the holiday types.
The company’s key financial objective is to grow overall profits by an average rate of 5% per
annum.
HH offers three types of holiday product – Package, Adventure and Prestige Travel. HH sells its own
products only, it does not act as an agent for other companies. HH uses the services of other
companies such as charter airlines and hotels, which it pays for directly on behalf of its customers.
Package
“Package” provides holidays mainly for families with children. Typically, these are for
accommodation in hotels (including meals) or self-catering apartments (excluding meals).
Adventure
“Adventure” caters for people aged mainly between 20 and 30, who want relatively cheap activity-
based holidays such as trekking, sailing and cycling.
Prestige Travel
“Prestige Travel” provides expensive and bespoke holidays mainly for couples. The Prestige Travel
product provides accommodation in luxurious international hotel chains across the world.
All three types of product include flights to and from the holiday destinations and hotel or self-
catering accommodation. HH has its own customer representatives available at the holiday
destinations to provide customer support. All-inclusive holidays (in which all food and drinks are
provided within the holiday price) are offered within each of the three product offerings.
HH supports its main products by offering travel insurance and foreign currency exchange. Travel
insurance, which is provided by a major insurance company and for which HH acts as an agent, is
usually sold alongside the holidays both by branch staff and by staff dealing with online bookings.
I trust you will find my analysis useful and please do not hesitate to contact me should you require
further information.
Kind regards

Anna Lane
Financial Accountant

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©2020 ACCA All rights reserved SBL Mock 2 Questions 10
Exhibit 5 – Newspaper article regarding legal action against HH following civil unrest in holiday
resorts

Financial Enquirer Online
Last updated: 15 March 20X8

Trouble  in  paradise  for  Editorial note: No win – no fee

services are offered by some
Halcyon Holidays  law firms in order to attract
Halcyon Holidays (HH) has clients who cannot afford to
received a large compensation pay for legal advice. The law
claim from customers who had firm pursues the client’s case.
travelled to a country which If it is successful, then the law
suffered from civil unrest in firm claims all legal fees from
July 20X8, at the peak of the Lines of empty deckchairs after the defendant. If the case is
holiday season. The unrest mass exodus from a resort lost, then the law firm does not
included protests, fighting with described in Halcyon’s brochure make any charge.
the police, and the destruction as a “tranquil paradise”
Jenny Diamond, HH’s recently
of government offices During the holiday season there appointed chief executive, has
throughout the country. was an unexpected series of inherited this crisis from her
Initially the unrest was confined violent protests in the major predecessor. The last thing she
to the capital city, but it later holiday resorts. HH advised its needs at this time is for the
spread to other towns and customers to remain within their company’s shares to be listed
holiday resorts. None of HH’s hotels during the protests, and that on the stock exchange.
customers were injured during flights would be provided to bring
the unrest. them home as soon as order had Written by FE’s tourism
been restored. Most customers correspondent
When the unrest started many
customers contacted HH to seek were brought home before their
advice. HH assured them that original scheduled return date, but
there had been no violence in some were delayed and did not
any of the country’s holiday return home until several days
resorts, and advised that they after their due date.
should go on holiday as HH compensated customers by
planned. refunding the cost of the hotel
The government had not accommodation for any days that
advised citizens against were lost because of the early
travelling to these holiday return. Many customers were
resorts. The terms of the travel dissatisfied with this and joined a
insurance that HH had sold to campaign initiated by a law firm
most of its customers state that offering clients a “no win – no
the cost of a holiday booking fee” arrangement. The law firm
will only be refunded on safety has written to HH to request a
grounds if the government has meeting to discuss an “out of
advised against travel.   court settlement”. The letter states
that the settlement should include
full refunds of the cost of all
holidays and compensation for the
stress suffered. It also seeks
compensation for loss of earnings
for the customers who returned
home late.

©2020 ACCA All rights reserved SBL Mock 2 Questions 11

Exhibit 6
The following meeting took place on 23 March 20X8 between William Fish (WF) and Clyde
Sinclair (CS), HH’s information technology director.
WF: Thanks for your time today Clyde. I would be grateful if you can give me some background
about HH’s e-commerce systems.
CS: Our online booking system was developed five years ago when the former chief executive
accepted that we needed to offer customers the option of booking online. The website itself has not
been modified at all during that time.
WF: What proportion of revenues comes through the website?
CS: About 60% of revenue in the year ended 30 June 20X8 was earned through online bookings.
WF: And presumably it is a 24/7 system?
CS: Absolutely. Customers can interact with the booking system 24 hours a day, seven days a
week. However, our website and back-office systems are unable to make a final booking with a
charter airline or with a holiday hotel outside normal office hours (of the charter airline or hotel).
These “out-of-hours” bookings are passed to, and processed by, the relevant airline or hotel on the
next working day. Until then, although the information is held on HH’s server, these bookings are
not finalised.
WF: Has this caused any problems?
CS: There have been several cases where our customers have booked online, only to receive an e-
mail 48 hours later to tell them that either the airline or the hotel has rejected the booking. This
problem arises because other travel companies use the same airlines and hotels as us and these
competitors’ websites can communicate directly with the airline and hotel systems on a 24/7 basis,
booking the places which our customers believed they had already secured.
WF: How do you plan to resolve this problem?
CS: I have contacted the major airlines and hotels in order to discuss a permanent connection to
their systems. However, they are unwilling to permit HH to offer a 24/7 online booking facility
unless we upgrade our systems to the latest industry-standard software.
WF: Surely that is the way forward?
CS: I believe so, but the HH board is concerned that an upgrade could prove disruptive and
expensive and is considering abandoning online bookings altogether.
WF: I will see what I can do to persuade the board to upgrade.
CS: Good luck!

End of Question Paper

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