MyConsultingCoach

Problem Solving Test

Practice Test 1

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Instructions

MyConsultingCoach Problem Solving Test

Practice Test Overview and Instructions
This practice test has been developed to provide a sample of the actual McKinsey Problem
Solving Test used for selection purposes. This test assesses your ability to solve
business problems using deductive, inductive, and quantitative reasoning. As the official
test, this practice case contains a total of 26 questions and should be completed in 60
minutes.

Similar to the real test, this test contains an answer sheet at the end. Make sure to allocate
enough time to transfer all your answers to the answer sheet. The answer sheet will be the
only document used to assess your performance, any answer present in the booklet but not
in the answer sheet will not contribute to your final score.

While completing this practice test, do not use any electronic devices (e.g., calculator,
computer) when performing calculations to answer the questions. Electronic devices will
not be permitted to be used during the actual test administration. Also, during the actual
test administration, you may use all blank space in the test booklet as scratch paper to as-
sist you in performing any calculations and recording any notes. No scratch paper will be
allowed.

The practice scenarios begin on the next page of this booklet. Only consider information
contained within the scenario when determining your answer. Considering all information
presented within the scenario is critical to answering questions correctly.

After you have completed the test, score your answers using the solutions located at the
end of this booklet and identify your areas of strength and weakness with our performance
radar.
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The Pace Newsvendors Group

The Pace Newsvendors Group

The Pace Newsvendor group is a Maltese retailer which operates a chain of high street,
airport, hospital and motorway service station shops selling books, magazines, news-
papers and entertainment products. The group has taken advantage of the recent cri-
sis to dramatically expand its network and now owns 50 stores throughout Malta and
the surrounding islands. The main driver of the expansion was the takeover in early
2012 of Nesta, a competitor focused on stationery and office supplies.

Chris Pace, the CEO of Pace Newsvendor is concerned by a decline in operating profit
following the Nesta acquisition and reaches out to your team for support. He told the
team: “Nesta was an extremely profitable company before the acquisition in 2012.
Since then I think we lost touch with customers and curtailed profits. We really need
to bring Nesta back on track”.

You just completed a preliminary data analysis on revenue of the Pace Group
(incorporating Nesta from 2012). Exhibit 1 shows the breakdown of revenues and Ex-
hibit 2 shows profits for the last 5 years.

Exhibit 1 Exhibit 2
4

The Pace Newsvendors Group

1. Given the priorities of Mr. Pace, the CEO of the Pace group, which of the fol-
lowing would be the MOST relevant question for the team to answer?
A. How can the Pace group further reduce costs without compromising
revenues?
B. How can the Pace group focus on the highest margin product lines?
C. How can the Pace group leverage Nesta brand’s specific competitive
advantages?
D. How can the Pace Group increase loyalty for the Nesta brand?

2. Which of the following can be inferred from Exhibit 1 and 2?

A. Nesta’s profit margins (pre-acquisition) are higher than Pace Group
(pre-acquisition) profit margins

B. Profit margins for the Pace Group after the acquisition of Nesta have
always been lower compared to before the acquisition
C. Profit margin has always been greater or equal to 25%
D. If costs were reduced by a further 2.2 million Eur in 2014, the profit
margin would be the highest from 2010

3. Which of the following analyses would be LEAST useful to analyze the root
causes for Pace Group’s underperformance following Nesta acquisition?
A. A profitability analysis by product line in Pace Group (including Nesta)
B. A detailed analysis of the product offering in both Pace and (pre-
acquisition) Nesta
C. An analysis of the key levers used for achieving cost synergies in the
post merger phase
D. A benchmark of product lines composition between Pace Group and
(pre-acquisition) Nesta
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The Pace Newsvendors Group

The CEO Chris Pace asked your team to complete a thorough analysis of all product
lines, starting from magazines. Mr. Pace regards magazines as the core business and
the main lead to attract customers to buy other products. In the last few years the
price of magazines soared dramatically, leading to a gradual decrease in the sales per
shop. However, the margins remained the same.
Mr. Andersen, the head of purchasing department, claims he negotiated a new, very
favorable agreement with the main publisher, accounting for approximately 50% of
Pace Group’s magazine revenues.

Exhibit 3 shows figures for expected magazine sales based on weather conditions. For
example, when the weather is rainy, sales of magazines are expected to be around 1
million copies. Exhibit 4 shows the impact of the proposed agreement on revenues
though changes in margin and salvage value (i.e. the refund that Pace Group gets
from publishers for unsold copies of magazine). The average price of magazines to
customers is 10 Euros.

Exhibit 3 Exhibit 4
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The Pace Newsvendors Group

4. The Pace group has to plan sales for a given day, which could be either rainy
or sunny, with 50-50 probability. In times of uncertainty your team recom-
mends to comparing lost margins from not having enough stock with costs of
unsold inventory. How many magazines should the Pace Group order for that
day in order to maximize profits with the CURRENT purchase agreement?
A. More than 1 million
B. 1 Million
C. Between 0.4 million and 1 million
D. 0.4 million

5. In which of the following circumstances would the PROPOSED purchasing

plan yield to higher profits than the CURRENT purchasing plan?
1. 800.000 copies purchased for a day when a day is expected to be
cloudy with 100% probability
2. 800.000 copies purchased for a day when a day is expected to be
sunny with 100% probability
2. 900.000 copies purchased for a day when a day is expected to be
sunny with 50% probability and cloudy with 50% probability

A. 2 and 3
B. 1, 2 and 3
C. 1 and 2
D. 3 only
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The Pace Newsvendors Group

6. Which of the following, if true, would be LEAST effective in challenging the

CEO’s assumption that magazines are an essential component of Pace
Group’s offering?
A. The percentage of customers that did NOT buy magazines is higher
than 80%
B. Young affluent individuals, a segment that is expected to grow by 15%
over the next 5 years, did neither have magazines in their top 10 pur-
chases nor cite them in the 3 main drivers for purchasing decisions
C. Over the last 5 years there has been a 25% growth in online magazine
subscriptions at the expense of printed editions
D. Two customers out of 3 cite products other than magazines as the main
reason for visiting stores
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The Pace Newsvendors Group

The CEO Mr. Pace asked your team to look into the business trends of statio-
nery: “while everybody says stationery is a hugely profitable business, I can see
only very low margin and competition on price. Did we get something wrong in
our position? I think that low profitability in Pace group is caused by other prob-
lems, but I am willing to understand more about the market and our position-
ing.” Pace Group’s positioning on Stationery did not change much over the last
10 years and has always been focused on a basic product line of home and office
products in the biggest stores.

Exhibit 5 shows the revenue trends and average margins of the market and the
Pace Group for the stationery markets.

Exhibit 5
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The Pace Newsvendors Group

7. Which of the following best describes the thoughts of Pace Group’s CEO re-
garding the stationery segment?
A. The CEO wants the team to understand how low profitability in sta-
tionery led to overall low profitability
B. The CEO wants the team to understand whether the current position-
ning prevents the Pace Group from making enough revenue in this
market

C. The CEO expects a confirmation of his views about an underperfor-

ming market
D. The CEO wants the team to better understand the market in order to
assess whether the cause for low profitability lies in the market struc-
ture or Pace Group’s positioning

8. Based on the data in Exhibit 5, what would be the share of total profit the
Pace Group would get if the market sales grow by 15% at constant profit mar-
gin, while the Pace Group would grow its sales revenue in line with the mar-
ket and increase its profit margin by 100%?
A. 11.5%

B. 10%

C. 8.6%

D. 5.7%
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The Pace Newsvendors Group

9. Which of the following facts would be sufficient to explain the different

trends in profits for the stationery business between the Pace Group and the
market?
1. The size of the average stationery customers increased from small
shops to medium sized companies, valuing convenience over price
2. The number of providers of stationery increased dramatically with the
access of new discount stores selling high quantities at low margins
3. The entrance into the market of online supermarkets offering home
and office delivery increased convenience for customers placing
orders in batches
4. Product range of stationery increased a lot, with new tech-related de-
vices being introduced
5. Margin levels on newly introduced tech products reach peaks of 35+%

A. 1 and 3
B. 2 and 3
C. 3 and 4
D. 4 and 5
11

InterPharma

InterPharma
InterPharma, is a major pharmaceutical company with USD 20 billion a year in reve-
nue based in Delaware, US, with regional sales offices worldwide. InterPharma has a
long, successful track record in researching, developing, and selling “small molecule”
drugs, a class of drugs that includes many blood-pressure or cholesterol medications.

The pharmaceutical sector has undergone some shocks in the last decades, including:
 Rising cost of new patents, due to stricter regulations to obtain certifications and
need to perform more complicated research activities
 Market entry of new, leaner biotech companies achieving better research track rec-
ords with limited resources
 Disaggregation of key phases of supply chain, including research, production and
administration to maintain a low cost base
 Increasing pressure from generic drug producers, both from developed and devel-
oping markets
While InterPharma has a significant portfolio of patents ensuring stable revenue,
most of them are going to expire in the next 5 years, seriously limiting the company’s
profitability going forward. At the same time the development costs for a successful
drug are a long term investment that can last up to 20 years and cost up to 2 Bn USD.
Moreover, launching research and development activity on a molecule ends up in a
successful launch only in a fraction of the cases.

The CEO is concerned that declining profitability will impact negatively on the share
price. At the same time, he is convinced that InterPharma should invest in new devel-
opments but is unsure about the sector to be targeted. He called your team to help
him address those strategic issues.

Exhibit 1 and table 1 show expected cash flows for the drugs currently being launched
in the Propel project, a recent drug research program in tropical medicine.
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InterPharma

Exhibit 1

Table 1: Cash flows for Propel Project drugs, $ Million

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InterPharma

10. Which of the following analyses should your team perform to best address
the objectives of the CEO?
A. A profitability analysis of main drug segments and a correlation with
predicted demand the segment
B. An overhaul of the production process by drug segment aimed at maxi-
mized savings from production and boosting profitability
C. A benchmark of profitability with key competitors by segment for
drugs currently produced and in development
D. An internal and external analysis of success rate and expected profita-
bility by drug segment

11. In which year will InterPharma break even from its investments in all Propel
Project drugs EXCEPT Supramed?
A. 14

B. 15

C. 16

D. 20
14

InterPharma

The CFO, who has been with the company for more than 10 years, expresses his con-
cern about performing analyses on market trends and expected likelihood of success
without fully understanding the status quo. He claims that the baseline for evaluating
profitability of new drug developments should be the profitability of existing drugs in
the same segments currently present in the portfolio. In his view, this is the only way to
take into account InterPharma’s unique characteristics and “way of doing things”.

12. Which of the following statements best summarizes the CFO’s statement?
A. Decisions to develop new drugs in a specific segment should be based
on the success rates of developments launched by InterPharma in
that segment, regardless of profitability
B. Decisions to develop new drugs in a specific segment should be based
both on the success rates of developments launched by InterPharma in
that segment and on drugs profitability

C. Decisions to develop new drugs in a specific segment should be based

on whether the InterPharma drugs in that segment are profitable, re
-gardless of developments success rate
D. The current accounting system does not reflect adequately the split of
revenue and costs between drugs
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InterPharma

13. Which of the following statements, IF TRUE, would best support an argu-
ment AGAINST the CFO’s statement?
A. The success rate in some segments is very low and investment deci-
sions could only generate revenue from sales in a subset of cases
B. Overheads are currently accounted at a company level and would be
difficult to attribute to each individual drug

C. The objective of some drugs is not profitability but consolidating mar-

ket leadership in a segment
D. The company has a strong reputation in some specific drugs leading to
high profitability that cannot be transferred to other segments

The team investigated the current drug research and development process, made up of
4 phases:
 3 trial phases with different success rates
 1 final filing to the Food and Drug Administration
A successful drug could yield around 2 Bn USD operating profit over a 20 year period
without accounting for the investment for research and development. However, many
drugs fail during the first three phases and do not reach filing.

Exhibit 2 summarizes the drug research and development process

Exhibit 2
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InterPharma

14. Which of the following statements about expected drug profitability is TRUE
based on the data presented in Exhibit 2?
A. An increase of 100% in the success rate of drug development in Trial 1
is less effective than the same increase in Trial 4
B. Removing Trial 3 would more than double overall expected drug pro-
fitability if success rates in other trial and filing phases are unchanged
C. Replacing Trial 3 with two trials with 70% success rate would increase
overall expected drug profitability if success rates in other trial and
filing phases are unaltered
D. An alternative arrangement of trials in which Trial 1 and 3 are re-
moved, Trial 2 has a 60% success rate and Trial 4 has a 10% success
rate would keep overall expected drug profitability constant if success
rates in the filing phase is unchanged

15. Interpharma invested x bn USD in starting the development of NicoProof, a

new drug. Which of the following equations best approximate the expected
profit margin of NicoProof without considering interest rates?
A.

B.

C.

D.
17

InterPharma

16. InterPharma decided to invest USD 100 m in NeoChem, a new drug, for addi-
tional pre-trial tests aimed at increasing the success rate. Which approxi-
mately should be the success rate of Trial 1 enabling InterPharma to break
even from its investment?
A. 100%
B. 20%
C. 80%
D. 0%

The marketing department has been asked by the CEO to maximize customer retention
and loyalty to InterPharma, a valuable asset when generic copies of most InterPharma
drugs are gradually entering the market.
In order to better respond to customer needs, the Marketing department is planning to
reduce the size of packaging, one of the main reasons of customer grievances. A recent
survey among InterPharma customers shows that 78% of customers rank excessive
package size first among the sources of dissatisfaction with the company.

The Marketing team has also provided your team with the following information:
 InterPharma has 2.8 million customers across 10 US cities
 Customers buy on average 1 InterPharma drug (in standard packaging) per month
 The average retail price is 12 USD
 InterPharma sells drugs to drugstore at 10 USD on average
 InterPharma makes a 90% profit margin on its drugs

The Marketing team of InterPharma claims that a substantial boost in profitability can
be achieved by reducing the average packaging size from 12 to 8 pills, bringing the re-
tail price to 10 USD and keeping unchanged the drugstore profit per package.
The CEO is concerned about the additional reduction in margins and asked your team
to forecast the impacts of the new strategy on sales and customer satisfaction.
18

InterPharma

17. What is the average profit made by interPharma on a single pill with the
CURRENT packaging?
A. 0.75 USD

B. 0.90 USD
C. 1.2 USD
D. 9 USD

18. What INCREASE in the number of packages sold is required to keep profita-
bility constant if the PROPOSED packaging is implemented?
A. 25%

B. 20%

C. 17%

D. 15%
19

ICIF Bank

ICIF Bank
ICIF Bank is a major banking group with USD 25 billion a year in revenues based in
western Europe. ICIF has built a strong reputation for fairness and reliability in ser-
vicing retail customers with its three main products:
 Savings accounts: accounts that let customers set aside a portion of their liquid as-
sets while earning a monetary return. Compared to current accounts, savings ac-
counts pay higher interest but cannot be used directly as money (for example, by
writing a cheque)
 Mortgages, used by purchasers of real estate to raise money to buy the property
and secured on the borrower's property. Mortgages allow the lender to take pos-
session and sell the secured property in the event that the borrower defaults on the
loan.
 Personal loans, granted mainly for consumer credit (e.g. customers buying house
appliances, furniture) that are not secured against any asset.

ICIF profitability has been declining in the last five years, mainly due to lowering mar-
gins on its products. A relatively stable market changed with the entry of several new
competitors, including foreign banks and peer to peer lending websites, operating al-
most exclusively on the internet. New entrants can leverage lean operations built
around their website and call centers. ICIF on the other hand sells most its products
through an extensive retail network that enables its employees to keep direct contact
with all customers.

The CEO asked your team to help him identify the best strategic decisions to counter
the decrease in profitability. He adds: “Our country-wide network has always been our
source of pride and main selling point. Now, however, its incredible cost levels are cre-
ating a huge fixed cost burden on our business. Upcoming regulatory changes in capi-
tal requirements will put additional pressure on our profitability, giving an edge to
peer to peer websites. On the other hand, every time we tried to downsize our branch
network in an area, our most profitable customers left and we ended up with a lower
bottom line. We really need to find the right balance between lean structure and high
customer satisfaction.”
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ICIF Bank

19. Which of the following best summarizes the CEO’s concerns?

A. The CEO acknowledges that low profitability was due to an inflexible
cost base and does not believe that it is possible to reduce the fixed
costs associated with the branch network without compromising cus-
tomer loyalty

B. The CEO outlines the importance of an extensive branch network for

maintaining a high level of customer satisfaction and loyalty but im-
plicitly acknowledges that in order to maintain it, the bank will have to
reduce its profitability expectations

C. The CEO realizes that the branch network has to be streamlined in or-
der to cope with existing and upcoming pressure on profitability but
does not want to take steps sacrificing long term customer loyalty for
immediate cost reduction

D. The CEO believes that the new capital regulation will give an unfair ad-
vantage to peer to peer lending websites, forcing existing bank players
to take further actions towards downsizing their branch networks
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ICIF Bank

20. Which of the following statements, if true, would NOT explain the CEO’s
argument that regulatory changes in capital requirements will strengthen the
competitive advantage of peer to peer lending websites?
A. Peer to peer websites’ cost structure is extremely lean, with very lim-
ited fixed costs, providing opportunities for quick changes and restruc-
turing in case of changing regulation
B. Since peer to peer websites are not treated as banks, regulation does
not apply to their lending activities
C. Although a more restrictive regulation should increase trust in the
banking sector, it is not expected to change the interest rate people
will expect from lending money to banks vs peer to peer lending web-
sites
D. Upcoming regulation will increase bank’s cost base through provisions
for non-performing loans, but such provision will not apply to peer to
peer lending websites
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ICIF Bank

In order to best assess ICIF’s status and perspectives, your team looks at the key com-
ponents of the income statement:
 Revenue:
 Spread between interest income (from lending money) and expenses (from
borrowing money). ICIF currently borrows at 3% interest rate on average
and lends at 5% interest
 Non interest revenue (commissions for products and other revenues)
 Costs
 Provision for losses from non-performing loans (NPL)
 Non interest expenses (labour, branches rent, SG&A, others)

Table 1 shows a simplified version of the income statement with the main items

Table 1

Interest rate spread 15.6

Non interest revenues 9.4

Total revenue 25
Provision for losses from NPL 7

Non interest expenses 19

Total costs 26
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ICIF Bank

21. Assuming that next year ICIF will have to borrow money at 4% interest rate
from the financial markets, and “Non interest revenue” will represent the
same share of total revenue, by approximately what percentage should ICIF
reduce its non interest expenses in order to break even?
A. 41%
B. 46%
C. 54%
D. 59%

22. Assuming that all other revenue and cost items remain the same, which of the
following would have a stronger impact on boosting profits?
A. A 2.5% reduction in Provision for losses from NPL
B. A 1% reduction in Non interest expenses

C. A 1% increase in Interest rate spread, keeping borrowing rate constant

D. A 2.2% increase in Non interest revenues
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ICIF Bank

In order to understand the main drivers of channel use, the team runs a round of in-
terviews in the main countries where ICIF operates. Customers can complete all steps
of purchasing any product in all the four channels:
 Branch: visiting local ICIF branch
 Internet: using ICIF website or app
 Call Center: contacting the Call Center, available 24 hrs a day, 7-days a week
 Financial advisor: through an extensive network of affiliated financial advisors
serving mainly high net worth customers

Exhibit 1 maps the customer’s journey across all channels in the evaluation, purchase
and post-purchase phases

Exhibit 1
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ICIF Bank

23. Which of the following can be concluded based on Exhibit 1?

A. Half of the customers who researched the products through call
centers requested after sales support from a physical branch

B. Among the customers who found information through the internet and
did not use the internet for the following step of the process, half went
to research the products in branches and half in call centers
C. After finding information in the call center, more people went on re-
searching the product in a branch than in call centers
C. Among the customers who completed their purchase on the internet,
the same proportion requested after sales support on the internet and
in call centers

24. What is the minimum percentage of total customers who reached the pur-
chase phase who did NOT change channels in their Customer Decision Jour-
ney?
A. 26%

B. 31%

C. 3%

D. 6%
26

ICIF Bank

According to the head of network, one of the biggest problems ICIF is facing is the
variability in lending rates between branches. Each area has historically been able to
determine the rate it lends to its customers between a band, but such bands have not
been recently updated, leading to potentially loss making loans. The team investigat-
ed the current rates for personal loans in key areas for the affluent segment of cus-
tomers.

Affluent customers are considered relatively safe, with a probability of defaulting on

their debt (not being able to repay it) ranging from 0% to 3% according to the area.
Since ICIF is considered a very stable bank by the financial markets, it borrows mon-
ey only at a 0.5 percentage points premium over the risk free rate of 2.5%. All the
loans examined in the sample are 1-year loans.

Exhibit 2 shows the interest rates ranges, average interest rates and probability for
affluent customers across the examined sample

Exhibit 2
27

ICIF Bank

25. Which is the current ranking of all the areas where ICIF is at least breaking
even on personal loans, from the most to the least profitable?
A. E, D, A, B, C

B. D, C, B, A, E
C. E, D, C, B, A
D. D, C

26. Which of the following options would the highest profit increase for areas A,
B, C?
A. A 0.5% decrease in the probability of default

B. A 1% increase in the interest rate

C. Borrowing money at the risk free rate

D. Increasing the average interest rate to the median interest rate

28

Answer sheet
Question Your Question Your
answer answer
1 14

2 15

3 16

4 17
5 18

6 19

7 20

8 21

9 22

10 23

11 24

12 25

13 26
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Solutions
1 C
Identify the CEO’s concern: the CEO asked the board of directors (before) and your
team (now) to identify opportunities for growth after the decline profitability follow-
ing the Nesta takeover. Different questions outline different focuses:

A. The CEO has not been specific on the actions to be taken. This is only an option
that could be right, but there are several other alternatives for boosting growth.
INCORRECT

B. Same explanation as before. INCORRECT

C. Facts (and the CEO’s statements) show that decline in profitability has been re-
lated to the performance of Nesta and to adopting the wrong levers to maximize
profitability. Understanding and leveraging its competitive advantages is what
the CEO is looking for. CORRECT

D. Too specific – the text does not mention whether loyalty is the main problem.
INCORRECT
2 D

Quickly scanning answers should already enable you to eliminate answer A:

A. We do not have any information of Nesta pre-takeover financials. INCORRECT

B. Profit margin in 2012 (5.9 / 21) is higher than ¼, while in 2010 profit margin
(2.5 / 10.5) is lower than ¼. INCORRECT

C. In 2010 profit margin (2.5 / 10.5) is lower than ¼. INCORRECT

D. If costs were reduced by a further 2.2 million Eur in 2014, profits would go to 5
+ 2.2 = 7.2 million Eur and profit margin to 7.2 / 20 = 36%. It is immediately
noticeable profit margin in other years would not exceed 30%. CORRECT
30

3 A

Since the focus of the CEO is understanding the underperformance caused by the
acquisition of Nesta we should identify which piece of analysis DOES NOT help us
understand what Nesta was doing better prior the acquisition:

A. Not providing information on what Nesta was doing better before takeover:
takes into account as-is product lines, which might be changed since takeo-
ver. CORRECT

B. Same as A but focus instead on pre-acquisition Nesta, relevant. INCORRECT

C. Helping us to understand what changed in Nesta after the takeover. INCOR-

RECT

D. Similar to B, relevant as focusing on the difference between pre- and post-

takeover Nesta. INCORRECT

4 B

First, calculate revenue, cost and profits for each magazine according to the current
purchase agreement:
 Revenue (when newspapers are sold) = price: 10$
 Profit (when newspapers are sold): 4$
 Newspaper cost: 6$ (since Profit = Revenue - Cost, Cost = Revenue - Profit)
 Loss when newspaper are not sold: 2$ (Salvage Value - Cost)

Second think about ranges

 400.000 newspapers are going to be sold in any case
 Newspapers between 400.000 and 1.000.000 are going to be sold only if
weather is sunny (50% probability), otherwise they have to be sold back to the
publisher at the salvage price. Hence, every magazine between 400.000 and
1.000.000 will contribute 4$ with 50% probability (sunny weather) and -2$
with another 50% (rainy weather), so expected profit will be positive ((4$ - 2
$)/2 = +1$) until the 1.000.000th copy included.
 Above 1000 there is 100% probability of unsold magazines (negative profit of
2$).

Therefore optimal quantity is 1.000.000

31

5 B
First, calculate revenue, cost and profits for each magazine according to the new vs
the old purchase agreement. Below are calculations for the planned agreement, you
can find calculations for the existing agreement in the solution to Question 4:
 Revenue (when newspapers are sold)=price: 10

 Profit (when newspapers are sold) profit is 4.5

 Newspaper cost: 5.5 (since Profit=Revenue-Cost, Cost=Revenue-Profit)

 Loss when newspaper are not sold are the same as cost as salvage value is 0

Second think about scenarios:

1. The new model is better: there are not unsold copies and profit for sold co-
pies is higher.

2. The new model is better: there are not unsold copies and profit for sold co-
pies is higher.

3. The new model would bring a total expected profit of 3.550.000$, generated
as follows: 3,600,000$ on the first 800.000 copies that are going to be sold
with 100% probability (4.5$ x 800,000 = 3.600.000) and an expected nega-
tive profit of 50.000$ on the remaining 100,000 copies (profit of 450,000
[4.5$ x 100.000] with 50% probability and loss of 550,000 [-5.5$ x 100.000]
with 50% probability). The existing model would bring a total expected profit
or 3.300.000, generated as follows: 3,200,000$ on the first 800,000 (4 x
800.000) and an expected positive profit of 100.000$ on the remaining
100.000 copies (a loss of 200,000$ (-2$ x 100.000) with 50% probability
and a gain of 400,000$ (4$ * 100,000) with 50% probability. The new mo-
del is better.
32

6 C
First, understand the question: there are two possible ways in which newspaper can
be treated as a non-core or non essential part of Pace Groups offering: first, they do
not generate profits (either due to low volumes of low profit margins), second, they
do not create lead, i.e. additional customers for other products. Think about wheth-
er answers can help include newspapers in one of the above clusters

A. Limited profits (low volumes)/limited lead. INCORRECT

B. Limited profits (low volumes)/limited lead. INCORRECT

C. No implications in terms of lead. Even if the market is decreasing it might

still be the best lead. Moreover, it does not provide information about whe-
ther the printed copies cannibalized by the online segment are from Pace
Group shops. CORRECT
D. Limited profits (low volumes)/limited lead. INCORRECT

7 D
First, understand the question: there are two key themes in the CEO’s statement: he
thinks that the market in itself is not profitable and he wonders whether Pace group
got its positioning right. He is asking your team to basically validate the above state-
ments. Go through the answers and understand whether both CEO’s intentions are
summarized
A. Neither concern is addressed. INCORRECT
B. The only concern that is really addressed is the positioning concern, no un-
derstanding of the market. INCORRECT
C. Only the concern about the market is addressed and in the wrong way be
cause the CEO does not expect a confirmation but a deeper understanding.
INCORRECT
D. Connects low profitability to both market structure and positioning. COR-
RECT.
33

8 A
Calculate total profit in the Market with the new scenario: expected revenue (29 *
1.15 = 33.35) * Margin (0.15) = 5
Calculate Pace’s profit: = expected revenue (5*1.15=5.75)*margin (0.05*200%)
=0.575

Without taking ratios, understand that 0.575 / 5 > 10%

9 A
Sufficient answers for changes in markets include a demand and a supply side, that
should be consistent together. Check which combinations respect this characteris-
tic:
A. Combination of DEMAND (1) and SUPPLY (3). Consistent, because bigger
companies are more likely than smaller ones to place orders in batches.
CORRECT
B. Both 2 and 3 are about SUPPLY. 2 is wrong because discount stores with
lower margins do not justify average higher margins in the market. INCOR-
RECT
C. Both 3 and 4 are about SUPPLY. Neither of them informs us about the diffe-
rence in profits between Pace Group and the market. INCORRECT
D. No information on whether the Pace Group is actually selling these new
products and on their relevance on the market. INCORRECT
34

10 D
Understand the question, skim the answers and read the introductory paragraph.
The two key drivers of future profitability are profitability of the drugs that are go-
ing to be launched and, most of all, success rate, as explained in the introductory
paragraph. Answers should include both of the above:

A. Does not mention success rate, demand is simply a driver of profitability. IN-
CORRECT
B. Does not even mention future drugs, the only source of revenue. INCOR-
RECT
C. Does not mention success rate. INCORRECT
D. Considers expected profitability and success rate. CORRECT

11 A
It is sufficient to sum all the cash flows from Multi Biotic and Anti Bacter through-
out all the years until the sum becomes positive. Year 14 is the first year when the
sum of all cash flows turns positive (+100)

12 C
Understand the question, skim the answers and read the introductory paragraph.
Pay attention to distinguish between what the CFO states and what he would better
have said (but did not mention). According to the CFO, in order to assess the profit-
ability of a given future drug we should take as a reference the profitability of exist-
ing drugs in the same segment present in the portfolio. He should have thought
about the likelihood for drugs in that segment to be launched successfully, but he
did not. Answers should reflect his point:

A. Mentions success rate, totally neglected by CFO. INCORRECT

B. Mentions success rate, totally neglected by CFO. INCORRECT
C. Restates the CFO’s point about profitability of drugs in existing product line.
CORRECT
D. Off-topic, the CFO did not mention the accounting system. INCORRECT
35

13 A
Reading through the introductory paragraph we learned that the future drug profit-
ability must be weighted by the likelihood of success, a fact totally neglected by the
CFO. It is immediately understandable that this was probably the main shortcom-
ing in the CFO’s argument. Answers should reflect his point:

A. Explains that profit has to be weighted by success rate in order not to turn a
potentially highly profitable drug into a failure. CORRECT
B. Misses point about success rate, off topic and focused on the present rather
than the future. INCORRECT
C. Misses point about success rate. Off-topic, the problem is propping up future
profitability and even if some drugs may not be as profitable as others, all
drugs together, representing company’s revenues, must be profitable. IN-
CORRECT
D. The comparison here would be inside the same segment. INCORRECT

14 D
Expected profitability of a drug is given by the ~2 Bn USD weighted by the proba-
bility of success through the trials and the filing. Skimming answers before going to
introductory paragraph and exhibits will save you some time in performing calcula-
tions that are useless at this point. Perform only the calculations required in the
specific answers, if any:

A. Since probability of success is the product of the success rates in all trials and
the filing, it does not make a difference whether you double the first or the
last number. INCORRECT
B. Removing Trial 3 (50% probability of success) would exactly double total ex-
pected probability of success. INCORRECT
C. Two trials with 70% probability of success would have together a 49% proba-
bility of success, lower than Trial 3 (50% probability of success). INCOR-
RECT
D. Total probability of success for all trials in existing setting is 40% * 50% *
30% = 6%. In the proposed setting it would be 60% * 10% = 6%, the same.
CORRECT
36

15 C
There are two possible ways of solving this problem:

1. Building the equation (and doing simplifications since equations are often sim-
plified to make them look less intuitive), advisable for simpler formula prob-
lems

2. Doing the calculations using available numbers and plugging them into all
equations.

Using the first approach the expected profit margin would be:

Which can be simplified into

16 A
Current expected profitability of a drug is (40*50%*30%*80%)*2bn=96m. Ballpark
estimation allows easily to identify that in order to receive additional 100m in ex-
pected revenues success rate should a bit more than doubled (100% increase).

17 A
If you read carefully the introductory paragraph this question will be very straight-
forward:

 Selling price for InterPharma: 10 USD

 Profit margin: 90%, Profit 9 USD / package

 Pills in current packaging: 12

 Profit/pill = 9/12, or 0.75

37

18 A
Calculate the profit/package with the new agreement and compare with the old fig-
ure to estimate the required grow in sales:

 Selling price for Drugstore : 10 USD

 Drugstore profit: 2 USD

 Selling price for InterPharma: 8 USD

 Profit margin: 90%, Profit 7.2 USD / package

 Profit/package CURRENT agreement: 9 USD

 Required increase in sales= 9/7.2 – 1 =25%

19 C
Understand the question, skim the answers and read the introductory paragraph.
The key reason for the engagement of your team is restoring profitability, possibly
through cost savings on the extensive network, without compromising customer
satisfaction. Answers should clearly state the above:
A. The CEO does not know how to reduce costs and keep high customer satis-
faction at the same time, but this is the key reason why he hired your team.
He does believe it can be done, he does not know how. INCORRECT
B. Same as A, he wants to preserve both profitability and customer satisfaction
but he does not know how to do it. However he believes it can be done, and it
is the main reason why he hired your team. INCORRECT
C. The CEO is aware that the network is too costly, but he does not want to
compromise customer satisfaction. CORRECT
D. Off topic, definitely not the main concern for the CEO. INCORRECT
38

20 A
Understand the question, skim the answers and quickly read the introductory para-
graph. You do not need a deep knowledge in capital requirements, but just an un-
derstanding that it is a problem about the quantity of capital the bank needs to keep
as reserve. Look for the answer that is not relevant:
A. Not relevant, capital requirement regulation is unlikely to affect the
organizational structure of a bank. CORRECT
B. Relevant, differences in applicability of capital requirement regulations.
INCORRECT
C. Relevant, impacts of the new capital requirement regulations on
profitability of lending activities. INCORRECT
D. Relevant, impact of capital requirement regulations on reserves. INCOR-
RECT

21 B
A change in the borrowing rate from 3% to 4% keeping lending rate unchanged im-
plies a 50% reduction in the interest rate spread. So ICIF would fall short of 15.6 / 2
= 7.8 Bn USD vs. today. Moreover, since today revenues are lower than costs, 1 Bn
USD (revenue – costs) would be needed on top to break even. Net interest expenses
should therefore decrease by 7.8 + 1 = 8.8 Bn USD. You can immediately see that
8.8 / 19 < 50% , but also greater than 40%, since 40%*19 = 7.6.
39

22 D
Assess the impact of each lever on profitability, keeping all other items constant:
A. Impact: 7 * 2.5% = +0.175 Bn USD
B. Impact: 19 * 1% = +0.19 Bn USD
C. Regardless of whether lending or borrowing rate is constant, an increase in
the spread implies an increase in revenue for the bank: 15.6 * 1% = 0.156
Since lending rate is kept constant, the increase in the spread Impact is
7 * 2.5% = +0.175 Bn
D. Impact: 9.4 * 2.2% = +0.20 Bn

23 B
Evaluate the statements based on the migrations between channels in different
phases:

A. More than half of the customers from call center (7% / 12%) went on to pur-
chase from the Call Center and all customers who purchased in the Call Cen-
ter had their after sales support from Call Center. INCORRECT
B. Out of the customers who performed the research in branches:
 20 must have come from Branches since all customer who search infor-
mation in branches research the product in branches.
 5 must have come from the call center, since 10% migrate from call cen-
ters in 2 flows and the flow size is 0% to 5%. The only way 10% can mi-
grate is with both flows being equal to 5%
 The remainder, 32 – 20 – 5 = 7 must have come from the internet
Out of the customers who performed the research in call centers:
 5 must have come from the call center for the reason above
 The remainder, 12 – 5 = 7 must have come from the internet. CORRECT
C. Exactly the same number of people went on to research in branch and call
center for the reasons stated above. INCORRECT
D. Out of the 19%, 7% requested after sales support on the internet and 10% in
Call Center, since the only two sources of customers requesting after sales
support on the call center are the call center itself, sending 7% and the
internet, sending 17% - 7% = 10%. INCORRECT
40

24 A
The trick to answer this question is looking at the customers in the purchase phase
who must have come from the same channel. In other words there should be no
customer being possibly replaced by other customers coming from different chan-
nels.

 In the branch channel, out of the 68% who completed their purchase, the 20%
that started looking for information had no choice but to stay in the channel,
since there were no movement to other channels.

 In the internet channel we do not have information on whether the 19% who
completed their purchase started its journey on the internet or with their
Financial Advisor

 In the Call Center internet channel we do not have information on whether the
7% who completed their purchase started its journey on the internet. Possibly
part of it (5%) may come from people who completed the information phase in
the call center channel, but those customers may have shifted to complete their
purchase in Branch.

 In the Financial Advisor channel, out of the 6% who completed their purchase,
all of them must have completed their journey in the same channel because no
customer from other channels shifted to the Financial Advisor channel.

Total customers who did not change did NOT change channel in their Customer De-
cision Journey is 20% + 6% = 26%

25 D
Since all loans are 1 year, in order to rank areas by profitability we subtract the bor-
rowing rate (3%) and the probability of default from the average interest rate:
 Area A: 2.5% - 3% - 1% = -1.5%
 Area B: 5% - 3% - 3% = -1%
 Area C: 4% - 3% - 1% = 0%
 Area D: 4% - 3% - 0.5% = 0.5%
 Area E: 1% - 3% - 0% = -2%
The only areas breaking even are D,C (ranked by profit).
41

26 B
Estimate the net effect of all proposed options for areas A, B, C keeping all other
variables constant:
A. 0.5% increase in profit in all areas.
B. 1% increase in profit in all areas.
C. 0.5% increase in profit (ICIF borrows money at a 0.5 percentage points
premium over the risk free rate of 2.5%) in all areas.
D. 5% increase in profit just for areas A and C. No information on the relative
weight of areas on total granted loans.
42

Answers
Question Answer Your Question Answer Your
answer answer
1 C 14 D
2 D 15 C
3 A 16 A
4 B 17 A
5 B 18 A
6 C 19 C
7 D 20 A
8 A 21 B
9 A 22 D
10 D 23 B
11 A 24 A
12 C 25 D
13 A 26 B