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8/12/2019 Mock 1 for practice of T4 partB exam
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D Unseen
Mock
8/12/2019 Mock 1 for practice of T4 partB exam
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DUnseen material provided for Mock
Additional (Unseen) information relating to the case is given on the following pages.
Read allof the additional material before you answer the questions.
ANSWER THE FOLLOWING QUESTIONS
You are the management accountant of D, reporting to the Main Boards Finance Director.
You have been asked to provide advice and recommendations on the issues which D mustaddress.
Question 1 part (a)Prepare a report that prioritises, analyses and evaluates the issues facing D and makesappropriate recommendations.
(Total marks fo r ques tion 1(a) = 90 marks)
Question 1 part (b)In addition to your report prepare a memo which will be sent to all employees to explain theimportance of changing attitudes within D to ensure that CSR becomes more of a focal pointfor all employees. Your memo should also communicate your ideas on how this could beachieved.
(Total marks for q uest ion 1(b) = 10 marks)
Your script will be marked against the TOPCIMA Assessment Criteria shown on thenext page.
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Case Study Assessment Criteria
Analysis of Issues 25
Technical 5
Application 15
Diversity 5
Strategic Choices 35
Focus 5
Prioritisation 5
Judgement 20
Ethics 5
Recommendations 40Logic 30
Integration 5
Ethics 5
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Acquisition of AZ by D
The Main Board of D are considering making an offer for AZ, a privately owned house
building company which is based in Country Y and has a significant operational presence
throughout many Asian countries. For example, AZ is currently involved in a major
government funded project to build over 4,000 housing units in India and has profitable
house building subsidiaries in China and the Middle East. Ds Chief Executive has been incontact with representatives of AZ who have been very forthcoming in providing him with
company information and have indicated their willingness to sell the company for 575
million which they believe is a fair valuation based on the companys forecasts and long term
earning potential.
If the company was purchased it would be integrated into D as a separate, fourth division
managed by the incumbent AZ Board with a gradual integration of senior D personnel
planned for the short term. Ds main Board are very much in favour of the acquisition for the
following reasons:
It would broaden the geographical scope of the group
It would give D direct access to a market within a growth economy
Ds Sales Director has family connections on the Board of AZ
Ds Main Board are willing to pay the price being asked by AZs shareholders provided that a
prudent estimate of the companys value, including the long term value beyond 5 years from
now, supports that conclusion. Ds institutional shareholders and lenders would insist on
reducing the debt exposure within AZ, however, which would necessitate D repaying all of
the bank loans in AZ falling due within the next 5 years.
The Finance Director of D has presented you with some relevant data provided by AZ
(shown in the table below) and has asked for your independent assessment of the
opportunity and the issues that should be considered if it goes ahead.
Name of company AZ
Revenue for the last 3 years (AZ has a
June year end)
2012: 580 million; 2011: 505 million;
2010: 418 million
Geographical analysis of revenues in 2012 India: 320 million
China: 140 millionSingapore: 97 million
Middle East: 23 million
Book value of non-current assets in 2012 120 million
Profit after finance costs and tax for the
last 3 years
2012: 12 million; 2011: 9.6 million;
2010: 8.4 million
Number of employees (worldwide) in 2012 1,640
Current value of order book 1,600 million
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Company estimates of forecast operating
cashflows (post tax) for the next 5 years
2013: 118 million; 2014: 126 million;
2015: 140 million; 2016: 163 million;
2017: 189 million
Gearing in 2012 45%
Loan repayments due in the next 5 years 2013: 95 million; 2015: 131 million
Capital expenditure commitments for the
next 5 years
2013: 30 million; 2014: 45 million;
2015: 70 million: 2016: 65 million;
2017: 80 million
The acquisition could be funded from a mixture of cash, loans and new equity which would
increase Ds gearing to 30%. AZ have asked D for a decision within the next 2 weeks after
which time the business will be offered for sale on the open market. The pre-tax cost of
capital to be used in assessing this opportunity is 8%. Ignore taxation.
Ds Sales Director has told the Board that he may be able to speak to his brother on theBoard of AZ to see if the price can be reduced but that his brother would expect payment for
this service.
New Centralised System
At present, all divisions of D use a bespoke project management system which was
designed and developed for them in 2009 after the integration of H, R and S into the group.
The system, called DPM, is well liked by its users and has delivered consistent and reliable
information since its installation. It is currently being depreciated over a 5 year period on a
straight line basis. The financial systems, however, are much older, usually off the shelf
packages with which the Finance Department at Main Board level has repeatedly hadproblems. These systems are different in each of the companies H, R and S and have never
been integrated into a common platform. One of the major problems is the lack of integration
between DPM and these financial systems. Each week it takes voluminous and time
consuming reconciliations and manual updating to overcome this. The IT Manager and his
team have had to work long hours installing upgrades, patches and bespoke interfaces to
ensure the information from the DPM system is accurately transferred to the three financial
systems and that data integrity is absolute. Last month the finance team had to work through
the night to complete the manual update. External auditors to D have made strong
recommendations that the financial systems be overhauled to ensure the accuracy and
effectiveness of financial information.
The Finance Director has identified two possible suppliers of a new, fully integrated
Enterprise Resource Planning System (ERPS) with project management capabilities
including network analysis and project evaluation review techniques (PERT). The new
system would wholly replace both DPM and the finance system and offer a single, unified
management information system across the group. The details are as follows (both
companies have offered a 5 year support and maintenance service which is included in the
quoted cost):
Ma leading global supplier based in Asia, which produces high quality ERPS
packages which are widely used in the construction industry. The DPM package
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currently in use at D was purchased from M in 2009. The cost is 9 million, payable
in advance. This includes all necessary training.
Sa world class supplier based in Germany. The Finance Director does not
consider this to be as sophisticated as the M system but the cost is 6million, 50%
of which is paid in advance and the remainder 12 months later. Training costs are
1,000 per person day and S believes D will require 350 person days of trainingeach year.
The IT Manager and the Finance Director of D have estimated that in total an average of 100
person days of overtime and other salary related costs per year could be saved if the current
problems could be eradicated. The average cost of each of these person days is 350.
Additional annual costs associated with the existing finance package such as upgrades and
external consultancy assistance amounts to 55,000.
The Finance Director would like you to assess this proposal over a 5 year period using Ds
interest cost of 8% and assuming that the cost of training will be invoiced at the end of each
year. Ignore taxation. He has also asked you to suggest and evaluate any alternatives which
D could consider in relation to the current problem, beyond investing in a new system.
Formal CSR Targets
NN has been overtly critical of Ds lack of buy in and proactivity towards the zero carbon
agenda and broader corporate social responsibility issues supported by the UK government
and many of Ds rivals. She has described the culture within D as archaic and blinkered
and has criticised an ingrained resistance among all levels of staff towards CSR.
As a result, Ds Main Boardhas been considering a formal policy to develop a consistent
Corporate Social Responsibility (CSR) code of practice for all employees and subcontractors/ business partners using a Balanced Scorecard approach. Under this proposal, D intends to
publish its targets and achievements to all stakeholders, both internal and external, at the
end of each half year (at the end of June and the end of December). All employees,
suppliers, agents and other outsourcing providers such as human resource bureaus, will be
asked to support Ds policies on issues such as safety standards, minimising carbon
footprints and wildlife conservation.
The Chief Executive, a strong advocate of NNs stance on this issue,is very vocal in his
support for Ds new CSR initiative and has put forward his belief that Ds divisionsshould
refuse to work with suppliers and agents who do not promise to comply with the policy. He
also believes that those who do should be asked to contractually agree to specific terms and
conditions which will further Ds goals in this area.
Although the aims of the policy are clear, the Finance Director is concerned about the
implications of introducing the scheme as described and has asked for your assessment of
this proposal together with suggested objectives and measures which could be included
within the Balanced Scorecard system.
Graduate scheme
NN has also criticised Dsuncoordinated approach to human resource management, in
particular the recruitment and development of house designers. Design, often outsourced to
independent agencies, is a key part of a house builders value chain, helping the business
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The Project Manager has revealed to the Main Board that X has offered a 2 million cash
rebate on the cost of the contract on the condition that no further action is taken in relation to
this matter.
End of Unseen