BUSINESS ANALYSIS

Time allowed – 3 hours

Total marks – 100

[N.B. – The figures in the margin indicate full marks. Questions must be answered in English. Examiner will
take account of the quality of language and of the way in which the answers are presented. Different
parts, if any, of the same question must be answered in one place in order of sequence.]
Marks

1. (a) MAES pharma was established eight years ago following merger of two large pharmaceuticals
companies. A large portion of its turnover of MAES Pharma Ltd in recent years has been
derived from one particular drug. The patent for this drug expires next year and it is expected
that its sales at that time will represent no more than 15% of total revenue. Few years ago, the
sales of this drug produced almost half the company’s entire revenue.
A new product, Coffrelief, has now completed its rigorous development phases and is being
marketed to pharmaceutical stores throughout the country by MAES Pharma. It is competition
with a similar drug, Coffhelp, produced and marketed by a direct competitor of MAES Pharma.
Medical research and opinion has concluded that Coffrelief is generally more effective than
Coffhelp in treating the condition for which they are intended. Both drugs are available over the
counter from pharmacies. The directors of MAES Pharma are optimistic that Coffrelief will
become very popular because of its improved effectiveness over other market products.
The retail market price of Coffrelief is Taka 15 per bottle, compared with Taka 100 per bottle
of Coffhelp. However, the recommended doges of Coffrelief is six times more than that for
Coffhelp. The bought-in costs per bottle to the retail pharmacist are Taka 5 and Taka 74 for
Coffrelief and Coffhelp respectively. Initial indications to the management of MAES Pharma
are that retail pharmacists tend to prefer to stock Coffhelp on the basis that it achieves 2.6 times
the level of gross contribution per bottle compared with Coffrelief.
It is estimated that the cost to the retailer of holding Coffrelief is Taka 4 per bottle and Taka 8
for Coffhelp. The availability of shelf space is a limiting factor for most retailers. The shelf area
occupied by each bottle of Coffrelief is 18 square centimetres and 60 square centimetres for
each bottle of Coffhelp. Early indications show that the average weekly sales volume for retail
outlets stocking both products are 120 bottles of Coffrelief and 20 bottles of Coffhelp.
Requirements:
(i) Demonstrate whether Coffrelief can provide a higher contribution to the retailer than
coffhelp by using:
(1) Cost Volume Profit analysis, taking account of the gross contribution per limiting factor. 3
(2) Direct Product Profitability analysis after charging holding costs. 3
(ii) Explain how MAES Pharma can market Coffrelief to improve its competitive position. 4
(b) The importance of effective risk management for project success is not disputed. You have
recently joined M Alam Power Limited, as Manager - Risk Management. M Alam Power
Limited is implementing a 1,320 MW coal fired power project at a cost of USD 3 billion.
Power generated by M Alam Power will be supplied to National grid line at a fixed price,
already agreed with Government. The project will be financed 40% equity from M Alam group,
the rest will be financed by local and international financial institutes. Land for the project is
already purchased and all the local and international construction partners are already selected.
The Board of directors of M Alam Power in a recent meeting decided to take effective risk
management strategies to reduce risk exposure of the project. Accordingly, the CEO has asked
you to prepare a report covering:
(i) Elements of risk management framework in an organisation. 3
(ii) Risk response strategies available to an organisation 3
(iii) Appropriate risk ‘transfer strategy’ for M Alam Power Limited 4

Page 1 of 5
 (c) RPL is a large company in an unregulated sector of the plastic industry. It has ambitious plans
for sales growth to increase profitability and returns to shareholders. In support of these goals,
senior management has established a flat management structure. Budget targets place
employees under considerable pressure but success in achieving and surpassing sales and
profitability targets is rewarded by bonuses and share options. Employees who do not achieve
their targets do not remain with the company for long.
Performance targets exist for expanding RPL customer base, sales value and profitability per
customer, and geographic and product based expansion. RPL zealously pursues cost reduction
with continual efforts to drive down suppliers’ prices. The company aims to eliminate any
wasteful practices in management and administration. RPL considers any expenditures that
does not lead directly to sales growth to be wasteful and the company minimizes its corporate
policies and procedures. As a result, RPL has tended to overlook unscrupulous practices in its
employees’ dealings with customers, competitors and suppliers in pursuit of its goals. The
company is unlisted and reports its profits to shareholders once in a year.
Requirements:
(i) Identify the major types of risk facing RPL that arise from its style of management. Give
reasons to support your answer. 6
(ii) Explain the significance of control environment in RPL. 3
(iii) From the perspective of a newly appointed non-executive director, evaluate the financial,
non-financial quantitative and qualitative controls in RPL in the context of RPL goals and
the risks facing RPL. 6

2. Green Chemicals Limited manufactures a wide-range of high quality and competitively-priced

products including soda ash, sodium bicarbonate, salt, caustic soda and urea. Its products go into
numerous end-use applications in variety of industries such as glass, detergents, papers, textiles,
agriculture, pharmaceuticals, paints, construction.
The most recent balance sheet of Green Chemicals is summarised below:
Balance Sheet of Green Chemicals Limited Taka Crore
Capital and Liabilities Taka Assets Taka
Borrowings Fixed assets
15% term loan from banks 91.19 Net fixed assets 1,741.45
14.5% loan from financial institutions 239.95 Investments 626.94
Debentures 98.47 Net current assets 871.38
Others (short-term) 336.03
765.64 Shareholder’s equity
Miscellaneous 3.14
Share capital 215.16
Reserves 1,820.18 2,035.34 Deferred tax liability 442.03
3,242.91 3,242.91
(i) Details of debentures:
 13.25% debentures, face value 50,00,000 each redeemable at par in three equal yearly
instalments commencing September 1, 2016, Taka 46.67 crore, total annual interest Taka
7.10 crore.
 11.15% secured redeemable non-convertible debentures, face value Taka 1,00,00,000 each
redeemable at par in the ratio 33:33:34 in three monthly instalments commencing from
January 2019 or earlier at the option of the company, Taka 6.80 crore.
 7.18% secured redeemable non-convertible debentures, face value Taka 2, 50, 00,000 each
redeemable at par in the ratio of 40:20:40 on March 31 2017, 2018 and 2019, Taka 45 crore.
(ii) Yield on 10-year treasury bonds as the risk free rate of return is 7.32%.
(iii) Long term rate of return of DSE 30 index is 18%.
(iv) Beta of Green Chemicals from the DSE is 1.08
(v) Tax rate 35%

Page 2 of 5
 The most recent income statement of Green Chemicals is as follows:
Income statement of Green Chemicals Limited Taka Crore
Income
Sales and operating income 2,544.15
Investment income 38.85
Interest on refund of taxes 38.26
2,621.26
Expenditure
Raw materials, stores, wages and other expenses 2,084.36
Depreciation 144.15
Interest (net) 50.91
2,279.42
Net Profit 341.84
Requirement:
Compute the Economic Value Added (EVA) for Green Chemicals Limited. 10

3. (a) Delta Limited wants to acquire Target Limited. The balance sheet of Target Limited as on
March 31 (current year) has the following assets and liabilities:
Taka lac
Liabilities Amount Assets Amount
Equity and share capital
(4 lac shares of Taka 100 each) 400 Cash 10
Retained earnings 100 Debtors 65
10.50% Debentures 200 Inventories 135
Creditors and other liabilities 160 Plant and equipment 650
860 860
Additional information:
(i) The shareholders of Target Limited will get 1.5 share in Delta Limited for every 2 shares;
the shares of Delta Limited would be issued at its current market price of Taka 180 per
share. The debenture holders will get 11% debentures of the same amount. The external
liabilities are expected to be settled at Taka 150 lac. Dissolution expenses of Taka 15 lac
are to be met by the acquiring company.
(ii) The following are projected incremental free cash flow (FCFF) expected from acquisition
for 6years (Taka lac):

Year-end 1 Taka 150

2 200
3 260
4 300
5 220
6 120
(iii) The free cash-flow of Target Limited is expected to grow at 3 percent per annum, after 6 years.
(iv) Given the risk complexion of Target Limited, cost of capital relevant for Target Limited cash
flows has been 13 per cent.
(v) There is unrecorded liability of Taka 20 lac
Requirements:
(i) Advise the company regarding financial feasibility of the acquisition. 10
(ii) Would your decision for acquiring Target Limited change, if FCFF after the forecast period
are assumed to be declined by 10 percent per annum after 6 years? 3

Page 3 of 5
 (b) The Marvelous Company presently has 2.2 million shares outstanding at Taka 8 million in debt
bearing an interest rate of 10% on average. It is considering a Taka 5 million expansion
programme. There are different views about the financing of expansion programme as stated
below:
1. The CEO is of the view that financing should be made exclusively with the ordinary shares
which will be realized at Taka 10 per share.
2. On the other hand, CFO proposed to finance the expansion wholly with debt bearing 11%
rate of interest.
3. Finance manager put third option financing of Taka 5 million i.e. issuance of 10% preferred
stock.
Earnings before interest and tax (EBIT) after the new funds have been raised, are expected to
be Taka 6 million. However, CEO desires to evaluate the proposals in case of different amounts
of EBIT as expected and it has been decided to assess the feasibility of financing at Taka 3
million, Taka 4 million and Taka 8 million of EBIT. The Company’s tax rate is 35%.
Requirements:
(i) Determine the likely earnings per share after financing for each of the three alternatives
above at all levels of EBIT. 7
(ii) What would happen under the condition of Taka 6 million EBIT, if the Ordinary share
could be sold for Taka 20 per share? 5
Note: produce your answer providing the information in the following format under each
condition:
Ordinary share Debt Preferred stock
EBIT assumed
PBT
PAT
Earnings available to ordinary shareholders
EPS

4. (a) ATM is a Bangladesh company that manufactures machine parts. ATM plans to establish a
wholly owned French subsidiary that will manufacture its range of products in France for
distribution across the European Union (EU). ATM has been established for many years, but it
is not widely known outside Bangladesh despite the fact that its product range has a very good
reputation.
ATM’s Finance Director visited Paris recently in order to discuss the financing in order to
discuss the financing arrangements for the subsidiary with a number of French banks.ATM
could easily borrow the funds at an attractive rate in Bangladesh Taka (BDT), but ATM board
would prefer to borrow in Euros (EUR). Unfortunately, the French banks felt that they would
be taking a risk if they were to back a foreign borrower who was unknown to them and so
either they refused ATM’s loan application or they offered to lend at a high rate of interest.
On the flight home the Finance Director entered into a conversation with MAC, a passenger in
the next seat. MAC is a founder of a French design company that wishes to build a factory in
Bangladesh. All of Bangladeshi banks have refused to lend to MAC. One French bank has
agreed to make the loan, but at a high rate of interest. MAC would prefer to raise the finance in
BDT and has decided to travel to Bangladesh in the hope that a face to face meeting with the
bank lending officers will be more successful than a negotiation by telephone and emails.
When ATM’s Finance Director and MAC realized that they had complimentary requirements
they started to discuss the possibility of a currency swap that might be mutually beneficial·
a. They each require to borrow the equivalent of €20 million for six years to establish their
respective businesses.
b. The current spot rate is BDT 155.0 to the EUR.
c. ATM can borrow in BDT at an annual rate of 9% for six years or in EUR at an annual rate
of 12%.

Page 4 of 5
 d. A French accountant has told ATM that a similar French business would be able to borrow
€20 million for six years at 6%.
e. MAC can borrow in EUR at a rate of 10% for six years.
f. All the proposed loans would be repayable in one lump sum at the end of borrowing period.
MAC proposes borrowing EUR 20 million from a French bank at 10%. ATM would borrow
BTD 3,100 million at 9% from the Bangladeshi bank. The two companies would swap these
principal sums and would each pay the interest on other’s borrowings. MAC is confident that
both parties will generate sufficient surpluses from their new foreign operations to raise the
necessary currency to meet the interest payments and to accumulate sufficient funds to swap the
principal sums back the end of six years.

Requirements:
(i) Explain three reasons why ATM would wish to borrow in EUR in order to finance the
proposed French subsidiary. 3
(ii) Calculate the estimated BTD to EUR exchange rate at the date of repayment in six years.
Note your answer should include an explanation of your method. 3
(iii) Calculate the net present value of ATM’s cash flows associated with financing if it accepts
MAC’s swap arrangements, assuming a required discount rate of 9% and that the
anticipated charge in exchange rates will occur every over six year period. 6
(iv) Evaluate the risks to ATM from MAC’s swap arrangement. 6
(b) It is 31 December. Global Trade Limited needs to borrow USD 200 million in three
months’ time for a period of six months. For the type of loan finance which Global Trade
would use, the rate of interest is currently 13% per year and the corporate treasurer is unwilling
to pay a higher rate.
The treasurer is concerned about possible future fluctuations in interest rate, and is considering
the following possibilities:
Forward rate agreements (FRAs)
Interest rate futures
Interest rate guarantees
Requirement:
Explain briefly how each of these three alternatives might be useful to Global Trade Limited. 6
(c) AIC Limited an engineering company based in the UK, has won a contract to build a resort at
Sonargaon, Dhaka. This project will require an initial investment of 700 million Bangladeshi
Taka and will be sold for 995 million Taka to the Bangladesh Government in one year’s time.
As the Bangladesh Government will pay in Taka, AIC is exposed to movements in the £/Taka
exchange rate.
Requirements:
(i) Construct a forex (FX) swap that will help to hedge the exchange rate risk. 4
(ii) How forex (FX) swap is useful to organisations? 2

Page 5 of 5