SBL Mock Exam

ACCA Specimen Paper 3 – Nehby Company

Suggested Answer By Sir Hasan Dossani

Answer 1– SFA for both options (20+4 marks):

▪ Format:

Report
To: Board of Directors, Nehby Company
From: External consultant
Subject: Report assessing two options from strategic perspective
Date: dd-mm-yy

This report assesses the two mutually exclusive options from strategic
perspective using the suitability, feasibility, acceptability framework.

Option 1: Continue with current business model and open 9th restaurant
Option 2: Enter hotel industry

▪ SUITIBILITY
Option 1:
o Continue to build on current strength and core competencies
o Maintain growth in current market
o Just focusing on capital city (i.e. no product or geographical diversification)

Option 2:
o Related diversification leading to risk reduction
o Food is a major part of hotel industry hence core competencies retained
o Can take advantage of government grant
o Healthy growth in hoteling industry, especially in north Ceeland, due to major sporting
event

▪ FEASIBILITY
Human Resource / Expertise:
o Talent is available in the country
o Loyal staff

1|Page
 o Proven ability to put together a high performance team with low turnover
o Experience with restaurant can be transferred to hotel

Financial Resources:
o Option 1 requires $5m only whereas option 2 requires significantly higher investment of
$21m
o In both option,s external financing would be required as there are limited funds in the
company

Technology
o Option 2 would require investment in technology / big data as there are Increasing
digitally active customers in hotel industry harnessing social media and mobile technology

Brand
o Already a strong brand in restaurant market
o Brand can be extended to hotel business
o Membership of the prestigious Worldwide Luxury Hotels Elite Group will be a great
marketing tool

▪ ACCEPTIBILITY
Option 1:
o NPV is positive ($0.65m) but lower than option 2
o Payback is 5.2 years with is exceeding 5 years threshold

Option 2:
o NPV is positive ($2.9m) and significantly higher than option 1, even though discounted at
a higher rate
o Payback is 4.8 years with is within 5 years threshold
o Will lead to substantial dilution of shareholding as significant capital is to be raised
o Some problems in the net cash flows projections:
▪ Sensitivity analysis needs to be done
▪ Grants have not been considered
▪ Venture capitalist expects discount rate of 20% vs 10% used in the calculations
▪ Venture capitalist expects occupancy rate of 50% for first two years vs 65% used in
the calculations
▪ Average room rent has been taken as whole industry and not related to high end
luxury hotels

2|Page
Answer 2A – Appropriateness of diversifying risks (6+2 marks):
▪ Format:

Briefing Notes
To: Board of Directors, Nehby Company
From: External consultant
Subject: Risk diversification and financing structure
Date: dd-mm-yy

This briefing notes cover appropriateness of risk diversification and factors

influencing financing structure.

▪ Define risk diversification

▪ Appropriateness:
o Currently 8 restaurants in one city (high concentration)
o Industry diversification (from restaurant to hotels)
o Geographical diversification (from capital to north Ceeland)

Answer 2B – Factors influencing financing structure (8+2 marks):

Following factors will influence the financing structure:
▪ Cash in hand $978k: Some of it can be utilized
▪ Tenure of financing: Long term financing would be required
▪ Loan Vs Equity
o Loan:
▪ Bank will charge same interest on loan regardless of business performance i.e.
high financing risk
▪ Current gearing level (should not reach 45% as per current terms)
▪ Collateral would be required
o Equity:
▪ Cost of equity is linked to business profitability
▪ However, equity will dilute the power of Nehby family as they would need
external shareholders / venture capitalists

3|Page
 Answer 3A – Appropriateness of diversifying risks (8+2 marks):
▪ Format:

Report
To: John Nehby, Director Nehby co
From: External consultant
Subject: Major project variables, governance changes and culture
Date: dd-mm-yy

This report recommends the measures which will be important for tracking
major project variables to ensure satisfactory progress. It also explains the
governance changes as a result of venture capitalist as well as include an
assessment of current culture and changes required.

Measures to track project:

▪ Formal business case / PID and benefit realization plan
▪ Detailed planning for each task:
o Quality (major milestones and quality checks)
o Time schedule (% work completed)
o Cost Budgets (actual vs budget variances)
▪ Progress report on a monthly basis
▪ Regular meeting of the Board to track the project

Answer 3B – Governance changes needed due to venture capitalist (10+3marks):

Mention 6-7 points only:
▪ Currently a family owned business
▪ Decision making and voting rights would shift to venture capitalist being majority shareholder
▪ There will be NED on the board to challenge Nehby family
▪ Longer term views will be reduced to 3-7 years’ view focusing wholly on maximizing profit
▪ Robust risk management and fast resolution of risk issues would be required
▪ No unnecessary expenses, expensive cars and flamboyant offices
▪ Excessive salaries not linked with performance will be unacceptable. Rewards to be linked to
business growth
▪ Formalized approach to planning with detailed control and feedback loops
▪ Profit centre reporting
▪ New key management role may be created and an outsider may be recruited as new blood
▪ Business strategies to include environment, social, governance and sustainability aspects

4|Page
Answer 3C – Analysis of current culture and how it may need to change (12+3 marks):
▪ Refer to Cultural Web Model by JS&W
▪ DRAW the diagram
▪ Power structure:
o Nehby family
o Particularly CEO who has a strong personality and who dominates the direction of
business to date
▪ Organization structure:
o Formal structure is in place based
o Currently functional structure
▪ Control systems
o High focus on quality and differentiation
o High rewards
▪ Rituals and Routines
o Long hours by all staff particularly on weekend
▪ Stories:
o Three sons have joined the business now and are leading key departments
▪ Symbols:
o Use of old historic buildings for restaurants and hotels
o Expensive car

▪ Cultural changes expected:

o Outside shareholder will dominate all decisions
o Divisional structure would be required to monitor restaurant business as well as hoteling
business
o Rewards will be linked with performance
o Expensive cars might be abolished
o Profit maximizing will be the whole and sole criteria for decisions

5|Page
Answer 4A – Weakness of current management information (6+2 marks):

Slide 1: Weaknesses of Current Management Reporting

• Budget are not flexed
• Breakup of admin expenses
• No reasons for variances
• Restaurant wise details not available

Supporting notes:
Explain the above points in paragraph form

Answer 4B – Improvement and suggested KPIs for Hotel Industry (10+2 marks):

Slide 1: Improvement in Management Reporting

• Profit centre wise details
• Flexed budget
• Variance analysis

Supporting notes:
Explain the above points in paragraph form

Slide 2: KPIs for Hotel Industry

• Occupancy %
• Revenue per available room
• Average daily rate
• Operating profit per square meter
• Customer satisfaction %
• Environment footprint
• Social footprint

Supporting notes:
Explain the above points in paragraph form

6|Page