BUSINESS STRATEGY Suggested

A
I Answers
Nov-Dec 2020
I. (a) Requirements:
i) What are the main external factors for a professional public accounting practice in Bangladesh?
Answer:
External factors· for a professional public accounting practice would include:
• Toe current competitive environment in this field including the threat of new entrants.
• Growth of this sector over the years
• Toe regulatory requirements such as income tax/value added tax laws, Companies act, Bank companies act,
accounting standards, auditing standards, financial reporting act, securities and exchange laws etc.
• Toe job market environment for accounting and other professionals, qualified chartered accountants.
• Toe general state of the economy and its effect on business.

ii) How do these main environmental/external factors affect the strategy of professional accountancy practice?
Answer:
Toe competitive scenario in this field has been hotting up over the year due to low entry barriers. In this intensely
competitive scenario, it is important to frame a long-term strategy. These factors create opportunities and threats.
New acts/regulations on related issues create a need for professional practices to provide guidance to clients.
Competitors or a thriving labour market with higher pay create threats. Possible value added service should be
identified that could be provided to differentiate from others.

(b) Requirements:
i) What are the differences between connected stakeholders and external stakeholders?
Answer:
Connected stakeholders, also called primary stakeholders, are those that have an economic or contractual
relationship with the organisation. For example, the company's shareholders, customers, suppliers, financiers,
advisors, consultants and competitors.

External stakeholders are those who do not directly work with a company but are affected somehow by the
actions and outcomes of the business. Example of external stakeholders include, the community, government,
pressure group and public groups.

Both connected stakeholders and external stakeholders are outside the organization. Their difference lies in the
degree of connectivity.

• Connected stakeholders supply resources to the organisation such as capital or sales revenue.
• External stakeholders do not have this direct connection but rather influence the context in which the
organisation operates.

ii) Discuss how connected stakeholders can respond to strategies which do not uphold their interests.
Answer:
Connected Stakeholders
Connected stakeholders can be viewed as having a contractual relationship with the organisation. The objective of
satisfying the shareholders needs to be fulfilled However, this cannot be in isolation; customers, employees' and
finance objectives must be met if the company is to succeed. Connected stakeholders may response to the
organisations strategy in the following ways if their interests are not recognised or upheld.

Connected Stakeholders Response Risk

Shareholders (Corporate Shareholders may sell their sharers ( e.g., to predator), vote against the
Strategy) company (in the AGM) or boot out the management of the organisation.
Bankers/Financiers (Cash Flow) Bankers or financiers of an organisation may respond in the following ways:
• Denial of credit
• Higher interest charge
• Receivership
Suppliers (Purchasing Strategy) Suppliers of an organisation may respond in the following ways:
• Stop supplying

..
• Refusal of credit
Wind down relationship
Legal actions (e.g.,, for unpaid debts)
Customers (Product Market Customers of an organisation may respond in the following ways:
Strategy) • Buy elsewhere
.
• Damage reputation of the organisation (bad publicity)
Legal actions

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(c) Requirements:
i) Discuss the environment for investment in logistics and freight sector in Bangladesh using the PESTEL analysis.
Answer:

Business environment of freight and logistics industry:

The freight and logistics industry came into being during 1991-92 in Bangladesh without any prior experience
The Index evaluated the country's logistics industry as highly progressive yet it mentioned that the country
needs to address major challenges such as the need for improvements in infrastructure, need for diversification
to other manufacturing segments beyond the apparel sector and the need for improvements in its
pharmaceutical, steel, shipbuilding, and food processing industries in order to record exponential market growth
in the future. The country also needs to focus on improving ways to strengthen its transport and logistics
systems in order to meet the needs of its growing economy, to boost export growth. By emphasizing the
logistics industry more efficiently, Bangladesh can significantly boost export growth.

Despite the absence of proper government regulations and policies along with inexperienced exporters and
importers, the freight and logistics industry has gained more significance and managed to reach imported goods
worth about USD 52.84 billion during the fiscal year 2018-19 and exported products worth about USD 36.67
billion, according to data from the Bangladesh Bank. Kuwait based Agility Global Integrated Logistics "The
Agility published Emerging Markets Logistics Index (AEMLI)" 2018 which considered Bangladesh as one of
the 45 major emerging markets in the world.

Logistics industry suffered due to the lack of skilled workforce and required communication skills.. The country
also generated more than 40,000 jobs directly during the past 30 years and become one of the crucial sectors
that are contributing to the economic growth of the country.
We will analyse the environment of this sector through PESTEL analysis as under:

i) Political: Political influence relates to the exteht to which it is government policy to support and promote
the freight and logistics industries in the form of government support in relation creating business
environment. Bangladesh has excellent political environment. There is no such unrest, hartal, strikes.,
With a rank of I 00 in Logistics Performance Index (LPI), Bangladesh is still struggling to improve the
performance compared to neighbor India, which ranked 44 and stood as the regional top.
ii) Economic: One of the major factor that is influencing the sector is demand and supply position and economic
stability of the country. Bangladesh is enjoying a stable economy with a very high GDP growth rate.
iii) Social: The increasing population and the change in the demographics have expanded long run potential
growth of the logistics and freight sector. Exports and imports from Bangladesh is growing steadily during
the last decades with a transformation from agriculture to industry.
iv) Technological: Increasing use of IT in automation process in traffic handling, inter-port communication,
document verification, storing, etc is leading to efficiency and savings in time and cost.
v) Ecological/Environmental: Emission standards could become stricter in the 'future in line with
developments in the advanced world. This may increase the cost of fuel
vi) Legal: There is no specific law for this sector. The legal issue can be both benefit and cost for the industry.
The Warehouse Ordinance Act 1959 which regulates the storage of commodities only. However, other
policies pertaining to land use and infrastructure creation have an indirect bearing on the warehousing sector.
The Land Use Policy 2001, National Integrated Multimodal Transport policy 2013, National Land Transport
Policy 2004, National Economic Zone Act 2010 are few important regulations influencing the sector.

ii) Would you suggest Padma Group to invest in this sector by forming a joint venture company with a foreign
logistics company? Explain with reasons.
Answer:

There are advantages and disadvantages for forming a joint venture company with a foreign freight and
forwarding company:

Advantages: Extended supply chain: Extended supply chain may be created by forming a joint venture with an
overseas freight forwarding company. As freight and forwarding business involves foreign countries, joint
venture partner may help in arranging new customers and managing the customers' requirements and
demands.
Global human resource management: This involves pan-national recruitment and development human of
resources. It helps to share experience with the overseas company' s resources. They can provide training,
share experience, create opportunities for the local employees

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 Using advariced technologies/ technology transfer: Joint venture partner can help for using technologies in
processing orders, inventory management, delivery, monitoring of location, office automation and many other
technological advancements.
Customers: Joint venture partner may arrange customers from their world-wide network, manage and satisfy
customer requirement.
Country specific advantage: This type of business has few country specific advantage. Few countries like
Singapore, UAE , Malaysia, India and many others are specialized in handling foreign vessels for their shipping
lines, sea ports, commercial hub for business. Few countries offer excellent duty free access to the goods in
their countries. J/V with a company is beneficial for a local company.
Savings of management cost: Savings in operating foreign offices, developing offices in the native county,
savings of managing offices are the benefits of such J/V.
Disadvantages:
Unnecessary control on affairs: the J/v Company may interfere in all the affairs of the company and the local
company may not have any control of the business due to to unnecessary interference in all the affairs
Tariff and non-tariff barriers: There may be tariff and non-tariff barriers in the partner countries. Arbitrary tax
structure, money repatriation may be difficult from the other countries and create problems for business
Political risks: There is political risk of business. Bilateral relation with the two government may deteriorate as
well as political unrest of that country may affect the business.
Sharing of major profit: The J/V partner may take the major part of profit without considering equitable
contribution of the partners. It is important to have well negotiated deed of agreement vetted by a prominent
lawyer considering issues relate to profit sharing, responsibilities of partners, contribution of each partners and
cost sharing principles, etc. There should be provisions to exit from the partnership agreement in case of
necessity.

iii) What are the supports needed by the sector from the Government for its further development and growth?

Answer:

Support from the government:

Despite the absence of proper government regulations and policies along with inexperienced exporters and
importers, the freight and logistics industry has gained more significance and managed to reach imported goods
worth about USD 52.84 billion during the fiscal year 2018-19 and exported products worth about USD 36.67
billion, according to data from the Bangladesh Bank. Kuwait based Agility Global Integrated Logistics "The
Agility published Emerging Markets Logistics Index (AEMLI)" 2018 which considered Bangladesh as one of
the 45 major emerging markets in the world.
We know that there are about 1000 local and foreign agencies are working in Bangladesh but there are about 20
major players. There are many small firms struggling to survival. In Bangladesh, there is a tendency to establish
industries whimsically without any in depth study. Hence, there is a risk of investing in and overcrowded sector.
- Around 100 local and 20 international logistics companies are providing services in Bangladesh. It has
expanded mostly in 1990's. The logistics companies are providing freight transport services through-sea, road,
and air, and rail freight transport is yet to be introduced in Bangladesh. Owing to the growing congestion on
roads, the shipping and inland water transport is growing rapidly. The industry is still struggling to improve the
performance compared to its neighboring country India, which stood at the regional top and ranked 44th for the
same year. For improvement of this sector attention fron the government is very important.
Further support required from the government:
i. Improve the productivity and capacity of the ports: Chattogram port and Mongla port are the two
dominant operational seaports of Bangladesh are playing a significant role in handling the country's cargo
movement with the former managing 90% of it. There is ample scope for growing the market when the
southwest coastal belt is utilized to its full potential which is capable of handling 70,000 TEUs a year but
recorded a mere 26,952 TEUs only in fiscal 2016-17 which is 36% less than the previous year.
ii. Provide storing facility: Due to the changing trends in the businesses, warehousing and distribution
operations should adopt the emerging changes and growing needs of the customers. The term 'Globalization'
brought rigorous changes in the field of logistics. Access to better logistics is imperative to attract investment
in the industry and trade. Accordingly, streamlining national logistic development mechanism is a must for
developing countries characterized by low logistics performance and unreliable supply chains. Bangladesh
has been overburdened with communication infrastructure challenges, which ·are deterring the potential of
logistic growth and cross border trade expansion.
iii. Development of modern system such as warehouse management system and transportation management
system: Storage and warehousing competency is the core enabler of an efficient logistics landscape. Trade
globalization has immensely progressed through riding on an integrated global supply chain and logistics
 system, which enabled global trade to reach around US$21 trillion.
iv. Policy development: Government may introduce policies to minimize associated trade costs for logistics
providers in order to help them stay afloat. The industry association need s to support the small players in
order to minimize de-growth while also paying attention to the blue collar workforce's economic
sustainability.
V. Technological development: the only ray of hope is that we saw a slight improvement only in timeliness and
tracking-cum-tracing indicators. However, an upward shift only in one indicator is not enough to ensure an
all-out logistics development in our country until we properly underpin the changing dynamics of the
logistics sector.
vi. Unfair competition: Unfair competition 'Would lead to bigger firms getting majority of the limited
opportunities Price war would lead to death of small and micro organizations
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vii. Stop smuggling: Contraband items smuggling may increase due to lucrative offerings
viii. E-commerce logistics, the recent horizontal extension of the logistics industry, will also be severely affected.
by social distancing among citizens and work from home mandates followed by different organizations
across the country which would lead to lower domestic demands.
ix. Congestion at Chattogram port and disintegrated regional connectivity. Frequent Dhaka - Chattogram
highway traffic congestion and limited Rail ICD facility.
X. Pressure for maintaining production and shipping schedules forcing manufacturers to ship finished goods
immediately after production. In this scenario, pre and post production storage of material is bare minimum
in Bangladesh.
xi. In order to address the pressing challenges encountered by stakeholders, a minimum 5% of GDP
infrastructure investment needs to be ensured for inclusive logistic facility network facilitation involving
private sector investment.
xii. Neglected inland water connectivity (Difficulty to use Rail ICD and Pangaon terminal due to capacity
constraints as well as traffic congestion within Dhaka)
xiii. As the hub of storage and distribution, these integrated parks should have all logistics and warehousing
activities such as warehousing, cold storage, availability of different transport modes, truck terminals, bulk
cargo terminals, ICD/CFS, facilities for packaging, material handling and intermodal transfer, etc.
xiv. Regulation to allow common bonded warehousing: Regulatory measure should be taken to allow the
creation of common bonded warehouses, which will allow exporters to import raw material and create large
inventories to address seasonal demands. Common bonded facilities will particularly help import intensive
exporting sectors like apparel and textiles.
Since Bangladesh is at the critical juncture of inclusive trade and economic development momentum, the demand
for a bespoke logistics facility is mounting. Additionally, the rapid transformation of SME into diversified
businesses requires ensuring a bundle of logistics competence to help thrive and strengthen our trade landscape.
Moreover, where the whole world foresees Bangladesh becoming a developed economy by 2041, a greater leap
forward in our logistics ecosystem is critical to calibrate our development visions in marking a real impact in the
global level-playing field. Government's proper attention is required for development of the industry.

2. Requirements:
• Prepare a SWOT analysis of Veolia's current strategic position, and highlight the key issues facing the company.
Answer:.

SWOT Analysis

Strengths
• Long established business with a previously good record of growth and profitability;
• Prestigious brand image and reputation and client base that includes top hotels and restaurants;
• High quality exclusive luxury products;
• · Reputation for innovation;
• Move towards outsourcing indicates that management are prepared to change;
Listed company and therefore should have access to finance.

Weaknesses
• Falling profits and negative operational cash flow are a cause of concern; i
• Unfashionable product, hence limited market with focus on older generation which restrict sales;
• Poor customer service and high level of overdue orders may lead to loss of business;
• High inventories leading to increased costs and risk of obsolescence;
• Inflexibility and slow response time due to centralised structure and authoritarian approach;
• Lack of economics of scale of global ceramics manufacturers and presumably also cannot match marketing budget;
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• Not diversified so no spreadin g of risk;

Lack of compliarlce with principles of good corporate governance;
• Institutional shareholders have been openly critical of the Chainnan, which will undermine confidence in the company
and its management.

Opportunities
• New product ranges eg designer everyday tableware;
New markets eg Asia, younger generation;
• Expand into related products eg glassware, crystal, gift items;
• Re-engineer supply chain;
• Change the structure of the company and the decision making

Threats
• Takeover by a competitor that may include a global manufacturer
• Changing dining trends mean product has reached end of life cycle;
• Credit crunch means further sales decline is likely;
• High levels of competition from cheap imports, large global retailers and more diversified competitors may further
reduce market share;
• Liquidation as a result of poor cash position
• Dissatisfaction of institutional shareholders may cause them to force change

Key issues are:

• The declining financial position raises questions over the long term viability of the business;
The long term change in dining habits which has significantly impacted on Veolia's sales and means that its core
product appears to be at the end of its life cycle. As a result Veolia urgently needs to pursue other opportunities for
growth;
• Poor customer service which is inconsistent with premium product;
The centralized authoritarian structure and dissatisfaction of the institutional shareholders which needs to be
addressed as a matter of priority.

i) Using Ansoff, analyse the proposal by the marketing director.

Answer:
The following matrix, developed by Ansoff, can be used to analyse the possible growth strategies available to
Veolia. ·

Existin) roduct New roduct

Existin market Internal efficienc and market Penetration Product develo ment
Newmarket Market develo ment Diversification

Internal efficiency
Internal efficiency and market penetration involve attempts to reduce cost or further penetrate existing markets by
taking market share from the competition. The outsourcing of same manufacturing in 2000 was presumably an
attempt at increasing internal efficiency in order to match competitors through low cost manufacturing, but this
does not appear to have generated additional sales. Thus, to achieve market penetration, it may be better, as the
marketing director suggests, to refocus on differentiating itself from its competitors on quality basis.

A marketing campaign aimed at emphasising the traditional English heritage might achieve this, although the
problems identified by the SWOT analysis suggest that this approach may not be viable given the change in dining
habits, the narrow customer base and the credit crunch. Indeed, given that Veolia is operating in a niche market, its
market share/level of penetration may already be high and there may be little scope to increase this, unless they
can persuade customers to buy multiple dinner services for different occasions or increase penetration of sales to
hotels and restaurants eg through links with Tony Khan.

Product development
Product development involves selling new products to existing customers and normally requires research and
development expenditures.

The introduction of the Tony Khan everyday designer tableware range may be construed as product development,
although it is also possible to view this as simply an extension of the existing product range.

The fact that Veolia intends to introduce this by the way of a joint venture would be deemed "External Domestic
Development" according to Lynch's expansion matrix. This shares some of the risk and may allow Veolia to save
on marketing as it will enjoy additional publicity from the association with Tony Khan.

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 Alternatively, as this product is not going to be targeted at existing customers, who are in the older age range and
may not associate with the celebrity chef, it could be argued that this is a means of market development.

Other possible product development opportunities include increased R & D to make innovation in patterns and
designs; own brand ranges for large retail chains; giftware, glassware and other associated items for dining.

Market development
Market development involves selling existing products to new customers and involves investment in marketing.

In case of Veolia, the marketing director is proposing two elements of market development:

• Domestic expansion in terms of targeting a-new market segment of younger customers;

• Overseas expansion in the context of exporting to Asian market According to Lynch, this could be achieved
organically or through some form of JV/licensing agreement.

Diversification
Diversification involves making new products for new markets. It can be vertical, horizontal, or conglomerate.
Veolia does not appear to be considering diversification at this point in time.

Possible diversification opportunities include wider ceramics manufacture for bathrooms and kitchens. As they
•
have no experience of this, it would be sensible to use methods like JV/acquisition.

ii) Explain the principles of good corporate governance which would be relevant and the ways in which non-
executive directors would be of benefit to the running of Veolia
Answer:

Corporate Governance

Corporate governance involves the set rules which governs the structure and determines the objectives of a
company and regulates the relationship between a company's management, its Board of directors and its
shareholders. It is not about the day-to-day management of operations or the formulation of business strategy.

Key aspects of good corporate governance involve transparency of corporate structure and operations; the
accountability of managers and boards to shareholders; and corporate responsibility towards employees, creditors,
suppliers and the local community. ·

The Bangladesh Securities and Exchange Commission (BSEC) "Corporate Governance Code 2018" which Veolia
currently does not comply with:

Independent directors
As per section 2 of BSEC Corporate Governance Code 2013:
All companies shall have effective representation of independent directors on their Boards, so that the Board, as a
group, includes core competencies considered relevant in the context of each company; for this purpose, the
□
companies shall. comply with the following: (a)At least one-fifth (1/5) of the total number of directors in the
company's Board shall be independent directors; any fraction shall be considered to the next integer or whole
number for calculating number of independent director(s);

Separate Chairperson and Managing Director

As per section 4 ofBSEC Corporate Governance Code 2013:
The positions of the Chairperson of the Board and the Managing Director (MD) and/or Chief Executive Officer
(CEO) of the company shall be filled by different individuals;

Board of directors' committees

As per section 4 ofBSEC Corporate Governance Code 2013:
For ensuring good governance in the company, the Board shall have at least following sub-committees: (i) Audit
Committee; and (ii) Nomination and Remuneration Committee.

As a listed company, Veolia needs to comply with BSEC Corporate Governance Code 2013. Moreover, the
stakeholders of the company would be substantially benefited by complying with the Corporate Governance Code,
which will ensure good governance across the organisation.

3. Requirements:
i) Discuss the impact of corona virus on the airline industries in Bangladesh in general and particularly on Bangladesh
Biman.
Answer:
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The worldwid,e rJivel ban ,amid the corona virus outbreak has directly hit the country's airline businesses, putting
operators under extreme financial pressure. The disruption in air connectivity has spilled over to other sectors such as
tourism, labour market, readymade garments and job market The corona virus turmoil hit Biman's business at a time
when it was expecting to make healthy profit by expanding flight frequencies to the new routes. Meanwhile, two new
Boeing Dreamliner aircrafts joined the Biman fleet in December last year, raising the total number of Dreamliners to
six. The airline had just made a turnaround in recent times. Biman entered into profit last fiscal year with a earning of
Tk 218 crore after suffering a loss of Tk 201 crore in the previous year.
Other than international routes, the business also decreased significantly on domestic routes due to government
restrictions. After the opening of local airports, number of passengers was not adequate leading to restricted number of
flights. The number of passengers fell by 25 to 30 percent on domestic routes after the virus outbreak as people are
aAA avoiding mass gatherings and travelling out of fear.
Biman Bangladesh Airlines has made a loss of Tk300 crore since the virus outbreak as it had to cut 70 percent of
flights around the globe owing to travel bans and a fall in passenger growth. Out of218 flights on international routes,
Biman has cut more than 150 flights so far. The corona virus fear also hurt businesses in local routes, compelling
Biman to cut domestic flights.
Bi man also backtracked from its plan to expand its wings to two new routes - Sharjah of UAE and Bahrain. With six
new Dreamliners in its fleet, Biman was planning to increase flight frequencies to India and Middle Eastern countries,
but coronavirus has now forced Bi man to put those plans on the backburner.
As part of the route expansion plan, Biman resumed its direct flights on Dhaka-Manchester route on January 5 after a
nearly eight year gap with the newly purchased Dreamliner.
Over the years, Bi man has witnessed a rapid fleet expansion and significant improvement in terms of performance with
carrying passengers in large numbers and making profits.
The drastic cut in flights in both domestic and international routes put severe pressure on the cash flow of the
company. If the situation lingers, it will be difficult to continue even loan payment for the airlines, and it will need the
government's support to reduce charges on airlines' operations and loan rescheduling facility, considering the current
disaster.
US-Bangla, the largest private local airline, has cut more than 60 percent of flights on international routes. The slash in
flight frequencies caused it to suffer a loss of Tk30 crore on an average in every month, according to the company. The
airline put on hold its route expansion plan to Delhi and Chennai. All the airlines are now going for cost-cutting
measures to survive. Bi man is now limiting its businesses by cutting various costs instead of expansion,
The grounding of flights caused immense sufferings for overseas workers, posing a severe effect on remittance inflow
which was on a downward spiral in the first two months of the current year.
Biman, which carries 40 percent of total passengers to Middle Eastern countries on employment visa, suspended flights
to Kuwait and Qatar. The number of flights in other routes of the Gulf region, the hub of the labour market for
Bangladesh, has also been slashed drastically. The manpower export has been declining for the global financial crisis,
and a fall in oil price and the outbreak of corona virus has worsened it
As a result, many expatriate workers could not go to their destination countries following flight suspensions from
Bangladesh. Manpower recruiting agencies are also worried about their business as only a few countries are allowing
Bangladeshis to enter. Some 130 workers are scheduled to go to Kuwait through my recruiting agency within the.next
one month. Their journeys have become uncertain after the Kuwait authorities imposed the ban.
Around 1,000 workers who have come to Bangladesh on vacation are waiting to return to Kuwait But now they are
uncertain about their timely arrival at the destination country. Travel baas in different countries hit the tourism industry
as travel agencies are not getting travelers.
The International Air Transport Association (IATA), in a press release issued said the coronavirus impact has created
enormous cash-flow pressures for airlines
So, corona virus has affected the travel and tourism industry severely which includes airlines, hotels, travel agents, workers
movement, and finally the economy as a whole. Of them, Biman is worst hit with its huge infrastructure and manpower
leading to high fixed costs.

ii) What would be the strategy of the management of Bangladesh Biman to address the corona effect?
Answer:

Strategies taken by Biman to address the situation: Bangladesh Biman has huge operational network with huge
investment It has recently taken loan to buy IO modem aircraft, dream liners, and planned to expand its routes to new
destinations. At this juncture its operation has been drastically affected by the Corona virus. It has now become a
challenge for Bi man for its survival. It has monthly operating cost along with the loan repayment of Tk 168 crore and it
is facing loss of 80 crore per month. Under these circumstances, Biman has already taken few steps to address the
situation. We suggest that Biman should take the following actions as its strategies:
i. Grounding the fleet and run on the economic consideration: Initially due to government restr iction but

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 now on economic consideration
ii. Concentrate on aircrafts that have low fuel consumption and maintenance expenditure
iii. Stop its route expansion plan at the moment
iv. Cutting down costs by reducing flights. Operate flight in those routes those are profitable and have
passengers.
v. Limiting its other expenses and stopping capital investment in an effort to handle the current situation.
vi. Reduce salary and benefit of few categories of employees Negotiate with the employees to accept lower
salary considering the financial or deferring- their payment of salary.
vii. Defer loan repayment and interest
viii.

ix.
Support from government:
financial support.
government should estimate losses in this sector and provide necessary

The government should seek financial support from international donor agencies which built funds for
corona virus-affected countries.
~l
X. The governments should be looking at all possible means to assist the industry for facing these extreme
circumstances. I
xi. Extending lines of credit, reducing infrastructure costs, lightening the tax burden are all measures that
governments will need to explore.

iii) Would it be poss ible for Bangladesh Biman to turn around in near future taking the loan from Sonali Bank?
Answer:

Reeling from a severe cash crunch amid global air travel restrictions owing to the coronavirus pandemic, Bi man
had to approach government for providing loan for its 'survival.
Birnan board of directors in a meeting approved a proposal of seeking the loan, for Taka 1500 crore loan, under the
prime minister's recently announced stimulus package for the sectors affected by the corona virus. With the loan Biman
will use the money to meet expenses of its permanent operation cost, including the salaries of its several thousand
employees,

Bangladesh Airlines finally got the approval for a loan of Tk 1,000 crore from Sonali Bank. Sonali Bank has
approved a loan of Tk 1,000 crore to Biman Bangladesh Airlines, which sought Tk 1,500 from the state-owned bank as
it was reeling from a fund crisis due to ongoing global travel restrictions
The board of directors of Sonali Bank gave the nod at a meeting on April 30 on condition that the national flag carrier
will give a sovereign guarantee, The finance division has given the sovereign guarantee to the bank on behalf of the
national airliner and the loan was finally approved,
From the latest report it appears that the airline incurred a loss of around Tk 450 crore in the last few months as it has
been running with "no income" following the Covid-19 outbreak,."Biman was forced to suspend its routes one after
another since January and it incurred a liability of Tk 1,300 crore in the last few months,"
As of today, most of the international airports are restricted to fly,the aircrafts due to government measures to combat
Corona spread out. Though there are few airports that are allowing to land aircraft subject to strict precaution for
testing corona positive reports and also 14 days of isolation. This is discouraging the travelers unless it is very
essential. Touring are not interested to bear such hassles.
Reports show that though few routes are open but the aircrafts are flying with a small number of passengers, which is (
not at all economical for the airlines. It has grounded their fleet and it is uncertain when the situation will be normal.
It appears that the sanctioned amount is not adequate as to meet the expenses from the following report:
It has to pay monthly maintenance expenses ofTaka 80 crore per month for the aircrafts
Ii has to pay salary and other expenses ofTaka 80 crore for the officials and employees
It has to pay loan for purchasing per month Taka 168 Crores
It has already accumulated a liability ofTaka 1300 crore
It is very clear that the amount as loan from PM special fund is not adequate and it may meet the short-term
requirements. The overall situation is still beyond the control and it is completely unknown when the situation will be
normal. Till today:
Most of the countries are still continuing ban on flight movement
Tourist spots are still closed for the visitors
Flights in few destinations are operating with only a few passengers and making loss
In these circumstances, Biman should make new approach to the Government for further loan. Biman may also
approach the donor agencies for loan backed by sovereign guarantee to face the fund crisis at a lower interest rate and
may also request the suppliers to defer loan payment and reschedule the repayment table.
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4. (a) Requirements: !
i) Discuss THRE E (3) strategic advantages and THRE E (3) challenges of acquiring Uttara Executive Fitness Club
compared with Gold's usual organic approach-to growth within the country.
Answer:

Strategic Advantages
• One of Gold's strategic aims is making gym s more accessible to people and to open more gym s in Dhaka. Uttara
Gyms will help satisfy this aim and is an opportunity for Gold to achieve growth in gym numbers.
• Synergies are possible whereby Gold and Uttara Executive Fitness Club reduce their aggregated costs by
operating together as one bigger organisation. For example, they may utilize bulk buying discounts or obtain more
favourable financing deals as part of a bigger operating unit.
• Also, by sharing ideas and expertise, both elements of the business may find more effective ways of working.
• It also appears that this particular acquisition may be cost-effective as Uttara Executive Fitness Club can be
obtained "at a very good price".
• Location advantage may also accrue to Gold considering the fact that Uttara Executive Fitness Club is located in
a very prime area. This may not be possible by Gold through organic growth.
• Economies of scale by means of equipment purchases and other services sought by the combination of the two
organisations.
Strategic challenges
• The acquisition of Uttara Gyms is a new type of venture to Gold. To date Gold has achieved growth purely
organically. It does not have experience of acquisitions and may need to obtain professional advice.
• Any acquisition process can be a concern for staff of Gold. Unlike organic growth, an acquisition leads to
uncertainty and fear, particularly at the target company, and if staff leave as a result, the target can become less
valuable.
• Integration problems - Differences in organisational culture may not be easy to manage. Through organic growth
Gold can roll out their desired company culture as they proceed. This will be more challenging when acquiring
Uttara Gyms and we will have to decide whether we want to change the culture at Uttara Gyms to bring it in line
with our Gold culture.
• Gold may end up assuming hidden legal liabiLities that are not apparent at the outset. Gold should therefore
obtain a warranty from Uttara Gym for a certain period should hidden legal issues escalate.

ii) Identify FOUR (4) ways to ensure that Uttara Executive Fitness Club staff remain reassured, motivated and loyal
throughout the acquisition process.
Answer: I

Ways to ensure Uttara Executive Fitness Club staff remain motivated. reassured and loyal throughout the change
• Uttara Gyms staff will need to be reassured, perhaps face-to-face, that Gold value and intend to keep the luxury ,
highly staffed approach. Communication should focus on educating staff about the impacts of the change and
dispel rumors.
• Gold may want to back up face-to-face meetings with good quality, regular and transparent electronic
communications by email or an intranet to keep staff informed of the process and their part in it.
• Another way of ensuring staff remain loyal and motivated is to involve them in the process. Letting them have
their say and giving them roles within the acquisition project will help them to feel part of the new organisation
and reassure them they have a future post-acquisition.
• Removing uncertainty through timely and appropriate information exchange is key to preventing staff from
searching for alternative employment through fear of their own position within the organisation. Reassuring staff
of their long-term role by sharing ideas and plans will reduce concerns and may lead to the generation of new and
useful ideas that smooth the course of the change.
(b) Requirement: Calculate the maximum amount that may be paid for the information from the market research
company.

Answer:
Probability Project A Project B Project C
TK000 TK000 TK000
Preferences I 0.3 400 800 500
Preferences 2 0.2 500 300 600
Preferences 3 0.5 700 200 400

Page 9 of 12
 Expected Value 570 400 470

Project A is the best choice (without the benefit of perfect information) as it has the highest expected value (EV) of
the NPV ofTk 570k.
With perfect information:
If market research say preferences I: select B and earn Tk800k- probability 0.3
If market research say preferences 2: select C and earn Tk600k - probability 0.2
If market research say preferences 3: select A and earn TK700k probability 0.5

EV (with perfect information)= (T800k x 0.3) + (T600k x 0.2) + (Tk700k x 0.5) =Tk710k
Value of perfect information is Tk710k- Tk570k = Tkl40,000

(c) Requirements:
i) What are the methods of pricing of products particularly in the case of rental property?
Answer:

Rent assessment methods

The Sales Comparison Approach (SCA)
The SCA is one of the most recognizable forms of valuing real estates. It is the method most widely used by appraisers
and real estate agents when they evaluate properties. This approach is simply a comparison of similar homes that have
sold or rented locally over a given time period. Most investors will want to see an SCA over a significant period to
glean any potentially emerging trends.
The SCA relies on attributes or features to assign a relative price value. These values may be based on certain
characteristics such as number of bedrooms and bathrooms, garages and/'or driveways, pools, decks, fireplaces-
anything that makes a property unique and stand out. Price per square foot is a common and easy-to-understand metric
allinvestors can use to determine where their property should be valued. In other words, if a 2,000-square-foot
townhouse is renting for Tk 100/square foot, investors can reasonably expect income in that ballpark, provided
comparable townhouses in the area are going for that, too.
Keep in mind that SCA is somewhat generic-that is, every building has a uniqueness that isn't always
quantifiable. Buyers and sellers have unique tastes and differences. The SCA is meant to be a baseline or reasonable
opinion, and not a perfect predictor or valuation tool for real estate. It's also a method that should be used to compare to
relatively similar buildings. So, it doesn't work if you're going to value the property you're interested in, that is 2,000
square feet with a garage, ·swimming pool, six bedrooms, and five full bathrooms with another property that has half
the number of bedrooms, no pool and is only 1,200 square feet.
The Capital Asset Pricing Model
The capital asset pricing model (CAPM) is a more comprehensive valuation tool. The CAPM introduces the concepts
of risk and opportunity cost as it applies to real estate investing. This model looks at potential return on investment
(ROI) derived from rental income and compares it to other investments that have no risk, such as Treasury bonds or
alternative forms of investing in real estate, such as real estate investment trusts (REITs).
In a nutshell, if the expected return on a risk-free or guaranteed investment exceeds potential ROI from rental income,
it simply doesn't make financial sense to take the risk of rental property. With respect to risk, the CAPM considers the
inherent risks to rent real property.
For example, all rental properties are not the same. Location and property age are key considerations. Renting older
property means landlords will likely incur higher maintenance expenses. A property for rent in a high-crime area will
likely require more safety precautions than a rental in a gated community.
This model suggests factoring in these risks before considering your investment or when establishing a rental pricing
structure. CAPM helps you determine what return you deserve for putting your money at risk.

The Income Approach

The income approach focuses on what the potential income for rental property yields relative to initial investment The
income approach is used frequently for commercial real estate investing.
The income approach is used frequently with commercial real estate investing.
I
The income approach relies on determining the annual capitalization rate for an investment. This rate is the projected
annual income from the gross rent multiplier divided by the current value of the property. So if an office building costs
$120,000 to purchase and the expected monthly income from rentals is $1,200, the expected annual capitalization rate
is:
14,400 (Tk 1,200 x 12 months) + Tk.120,000 = 0.12 or 12%

Dao» 1ff 1>

 This is a very sim plified model with few assumptions. More than likely, there are interest expenses on a mortgage.
Also, future rental incomes may be more or less valuable five years from now than they are today.
Many investors are familiar with the net present value of money. Applied to real estate, this concept is also known as a
discounted cash flow. Taka received in the future are subject to inflationary as well as deflationary risk, and are
presented in discounted terms to account for this.
Gross Rent Multiplier Approach
This approach values a rental property based on the amount of rent an investor can collect each year. It is a quick and
easy way to measure whether a property is worth the investment. This, of course, is before considering any taxes,
insurance, utilities, and other expenses associated with the property, so it should be taken with a grain of salt
While it may be similar to the income approach, the gross rent multiplier (GRM) approach doesn't use net operating
income as its cap rate, but gross rent instead. The gross rent multiplier's cap rate is greater than one, while the cap rate
for the income approach is a percentage value. In order to get an apples-to-apples comparison, you should look at the
GRMs and rental income of other, similar properties to the one in which you're interested.
Let's say a commercial property sold in the neighborhood you're looking at for $500,000, with an annual income of
$90,000. To calculate its GRM, we divide the sale price by the annual rental income: $500,000 + $90,000 = 5.56. You
can compare this figure to the one you're looking at, as long as you know its annual rental income. You can find out its
market value by multiplying the GRM by its annual income. If it's higher than the one that sold recently-Le. for
$500,000---it may not be worth it, so consider moving on.
The Cost Approach
The cost approach to valuing real estate states that property is only worth what it can reasonably be used for. It is
estimated by combining the land value and the depreciated value of any improvements.
Appraisers from this school often espouse the highest and best use to summarize the cost approach to real property. It is
frequently used as a basis to value vacant land.
For example, if you are an apartment developer looking to purchase three acres of land in a barren area to convert into
.condominiums, the value of that land will be based upon the best use of that land. If the land is surrounded by oil fields
and the nearest person lives 20 miles away, the best use and therefore the highest value of that property is not
converting to apartments, but possibly expanding drilling rights to find more oil.
Another best use argument has to do with property zoning. If the prospective property is not zoned for residential
purposes, its value is reduced, as the developer will incur significant costs to get rezoned. lt is considered most reliable
when used on newer structures and less reliable for older properties. It is often the only reliable approach when looking
at special use properties.
The Bottom Line
There is no one way to determine the value of a rental property or rental value. Most serious investors look at
components from all of these valuation methods before making investment decisions about rental properties. Leaming
these introductory valuation concepts should be a step in the right direction to getting into the real estate investment
game. Then, once you've found a property that can yield you a favorable amount of income, find a favorable interest
rate for your new property using a mortgage calculator. Using this tool will also give you more concrete figures to
work with when evaluating a prospective rental property.

ii) What would be the recommended rent of the buildings ifwe follow the no profit no loss principle?
Answer:

Computation of suggested rent for JERI:

Here as there is no profit objective and we shall have to compute the rent on no profit no loss basis to recover the
investment cost and the maintenance cost.
Capita,
. l cost:
Admin building Other buildings
Capital cost (in million Taka) 6 395 245
Arca 306.000 125.000
Capital cost per square feet 20 898 12376
Capital cost per year (30 years life) 696 412
Capital cost per month per sft 58 34

Maintenance cost·
Admin building Other buildings
Maintenance cost million per year 54 27
Arca 306000 125.000
Cost per square feet per year 176 216
Page 11 of 12
I Cost per sft per month 14 18

As the users of the main building shall use the other buildings also, they must share the cost of other facilities Monthly
rent on cost basis would be as follows·
Main building Other buildings Total
Capital cost 58 34 92
Maintenance cost 14 18 32
Total cost 72 52 124

So on cost basis if we consider no profit rent would be Tk. 124.rent per month. This also seems reasonable comparing
the rent of surrounding locations.
We have used the non-discounting approach although the discounting method could also be used. Had the discounting
approach been used, we would need to find out the annuity over a 30 year period for the initial investment using a
discount rate (not given in the problem).

---The End---

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