BUSINESS ANALYSIS

Time allowed – 3 hours

Total marks – 100

[N.B. - The figures in the margin indicate full marks. Question must be answered in English. Examiner will take
account of the quality of language and of the way in which the answers are presented. Different parts, if any, of
the same question must be answered in one place in order of sequence.]
Marks
1 (a) BD Rex Limited is a medium sized pharmaceutical company. In common with other
pharmaceutical companies, it has a large number of products in its portfolio, though most of
these are still being developed.
The success rate of new drugs is very low, as most fail to complete clinical trials or are believed
to be uneconomic to launch. However, the rewards to be gained from a successful new drug are
so great that it is only necessary to have a few on the market to be very profitable.
At present, BD Rex has 150 drugs at various stages of development; with many still being
tested or undergoing clinical trials prior to a decision being made as to whether or not to launch
the drug. Currently, BD Rex has only products that are ‘on the market’:
 Medison is a drug used in the treatment of heart disease. It has been available for one year
and has achieved significant success. Sales of this drug are not expected to increase from
their current level.
 Rexspirin is a painkiller. It was launched more than eight years ago, and has become one
of the leading drugs in its class. In a few months the patent on this drug will expire, and
other manufacturers will be allowed to generic copies of it. Rexspirin is expected to survive
a further one year after it loses its patent, and will then be withdrawn.
 Rexbeta is used in the hospital treatment of serious infections, it is a very specialised drug, and
cannot be obtained from a doctor or pharmacist for use outside the hospital environment. It was
launched only three months ago, and has yet to generate a significant sales volume.
Required:
Using the product life cycle model, briefly analyse BD Rex Limited’s current product portfolio. 6
(b) “The risk management process is an ongoing one – risks must be continually monitored to
determine any change in profile which may lead to procedure to control pertinent risks being
altered”. Discuss the steps of “risk monitoring and control” of an organisation. 4
(c) Legacy is a bespoke furniture company, making unique pieces of furniture to clients’
specifications. The products are manufactured using a combination of highly technical
machinery and skilled craftsmen. Legacy’s current clients are wealthy individuals who want a
custom-built piece of furniture for their own homes. The company has one showroom where
samples of bespoke pieces of furniture are displayed. These sample pieces are not for sale.
The company wishes to implement a planned growth strategy. To enable this, the company has
increased its manufacturing capacity with the aim of selling to corporate clients such as hotels.
Producing a greater number of bespoke pieces for the same client would deliver some
economies of scale. The production manager claims this strategy would reduce set up times and
increase procurement discounts, as raw materials would be bought in bulk.
Procurement
High quality materials are used in bespoke furniture manufacture and Legacy uses a specialist
procurement company to source specific materials, such as high quality pieces of oak wood of given
dimensions. This is an expensive method of procurement and can also delay production, as Legacy
cannot confirm an order with the procurement company until a design is agreed with a client. As
order to delivery time is already high, Legacy is keen to reduce this procurement time.
The production manager has suggested the implementation of e-procurement, to support
planned business growth.

Page 1 of 5
 He is considering moving to e-procurement, but is keen to ensure that such a move will not lead
to a lower quality of raw materials. If e-procurement is adopted, the company will recruit a full-
time procurement manager and cancel its agreement with the specialist procurement company.
Marketing
Until now, Legacy has relied predominantly on word-of-mouth marketing. Most new clients
have commissioned pieces of furniture after seeing a bespoke piece in an existing client’s
home. High quality brochures are produced annually and are available on request. They are also
placed on display at exhibitions and in the showroom. A new marketing manager has been
recruited and has been tasked with analysing whether e-marketing could enhance the current
marketing mix. The marketing manager has also identified the following issues:
Visualization of the product
Because the products are bespoke, it is difficult for a client to visualize what the finished
product will look like. This can sometimes lead to a failure to make a sale, as the customer is
not sure what they are getting.
Pricing
As materials are not sourced until a design is agreed, it is difficult to provide accurate up-front
prices.
Legacy currently uses cost plus pricing, but the marketing manager understands that this may
deter some clients.
Showroom
There is only one showroom and it is not considered worthwhile opening more as more pieces
of furniture would have to be created especially to furnish it. Therefore it is not possible for
many potential clients to see the quality of the furniture.
After-sale support
As there is no guaranteed delivery time for the products, Legacy provides production progress
updates to their clients on request. When the client phones or emails, the production team
photograph the work-in-progress and send the pictures to the client. The client can also visit the
manufacturing plant to check on progress, but this requires prior arrangement due to legal
health and safety requirements.
Legacy intends to remain a producer of bespoke furniture items. It does not wish to produce
standard products or produce to inventory. The only non-commissioned pieces of furniture it
produces are for display in the showroom.
Required:
(i) Evaluate the use of e-marketing at Legacy to enhance each of following five elements of
the marketing mix: price, promotion, place, processes and physical evidence. 15
(ii) Describe the principles of e-procurement and explain the benefits and risks to Legacy. 10

2. (a) Northwest Pharmaceuticals Limited, a leading pharmaceuticals company of the country, listed
with Dhaka and Chittagong stock exchanges. Summarised financial data for Northwest
Year Post tax Dividends Issued Share price All-share Inflation rate
earnings BDT million shares index
BDT million BDT million BDT
2012 86.20 34.50 180 3.60 2895 6%
2013 92.40 36.20 180 4.10 3300 5%
2014 99.30 37.60 180 3.45 2845 4%
2015 134.10 51.60 240 4.59 2610 3%
2016 148.60 53.30 240 4.48 2305 3%
Required:
Explain, with supporting numerical evidence, the current dividend policy of Northwest
Pharmaceuticals Limited, and briefly discuss whether or not this appears to be successful. 6

Page 2 of 5
 (b) Digital Connect Bangladesh Limited (DCBL) is considering to replace an existing piece of
equipment by a new one. The new equipment is operationally efficient and will result in
savings in operating costs estimated at BDT 150,000 annually.
The new equipment will cost BDT 300,000 and will be purchased at the beginning of the year.
The equipment dealer states that most companies use a 4-year life while depreciating
equipment with no salvage value. As the equipment will be operational during the second
quarter of the year, only 60 percent of the estimated annual savings would be obtained in the
first year. The company will incur a one-time expense of BDT 30,000 in transferring
production activities from the old equipment to the new one.
The equipment currently being used has a book value of BDT 20,000. A review of its condition
reveals that it can be used for additional 4 years. The firm would receive BDT 5,000 net of
removal costs if it is disposed off now. However, it will have no salvage value after 4 years.
DCBL uses the declining balance method of depreciation. The equipment is subject to 25 per
cent depreciation together with other assets in the block. Assuming that the full year’s
depreciation is taken in to account for the first year, and the corporate tax rate and the required
rate of return are 35 per cent and 15 per cent respectively.
Required:
What action should DCBL’s management take? Assume further that shifting expenses are
allowed as a deductible item of expense for tax purposes in the year in which they are incurred. 9
(c) Superfine Fabrics Limited, a composite textiles facility is contemplating to acquire Excellent
Textiles Limited. The management of Superfine Limited wants you to compute the maximum
price it should be willing to pay to acquire Excellent Textiles Limited as per adjusted present
value approach.
You have been provided with the following information:
(i) As a result of acquisition, it is expected that the FCFF of Superfine Fabrics Limited are
likely to increase as follows for 6 years
BDT. 000
_________________________________________________________________________
Year-end 1 12,000
2 15,000
3 20,000
4 22,000
5 14,000
6 10,000
(ii) The FCFF of Excellent Textiles Limited are expected to be constant after 6 years.
(iii) Unlevered cost of equity is 15 per cent.
(iv) 10% debt (the extent of BDT 12,000,000) will finance part of acquisition cost. Debt will be
reduced to BDT 7,000,000 at the end of year 6 by repaying BDT 1,000,000 at the end of each
year, commencing from year 1. Debt level is expected to remain at that level thereafter.
(v) Corporate tax rate is 35 per cent
(v) Advantage from debt is to be valued at cost of debt
Required:
Calculate the maximum price Superfine Limited should be willing to pay to acquire Excellent
Limited. 15

3. Kamal & Kamal (K&K) was formed over 20 years ago to manufacture branded electrical and
electronic goods for other companies. These goods are made to the specification required by these
companies, whose own brand logos are attached to the products during the production process.
K&K currently manufactures hundreds of products, although some are very similar in specification,
with slight differences due to the requirements of each customer. K&K does not sell its own

Page 3 of 5
products to individual domestic consumers. Sales teams therefore focus on high volume sales to
large companies.
The electrical and electronic goods market is increasingly competitive, with overseas companies
especially the Chinese are entering the market.
K&K’s customers have responded to this by demanding lower prices and better quality products
from K&K. As the electrical and electronic goods market is technologically innovative, there is
also a requirement to continually develop new products or enhance existing ones.
The sales manager, Jamal Satter, has revealed his sales team figures for the year 2016 and is
excited to announce that the team has exceeded sales volume targets. However, his enthusiasm is
not shared by the business controller,
Farid Khan, who has written a report to the chief executive officer (CEO) suggesting that there are
fundamental performance problems in the company. An extract of his report is given below:
Business performance
‘In a period of increased competition and growing product ranges, we are failing to keep control of
the profitability of our business. Table 1 presents a summary of our performance for 2016,
showing problems with our pricing and/or our cost control. This has affected profitability.
Table 1 – Budgeted versus actual performance for 2016
Budget Actual
Units Units
Sales volume 243,000 270,000
Budget Actual
Taka000’s Taka 000’s
Sales revenue 36,450 36,450
Direct materials (15,795) (18,630)
Direct labour (3,402) (4,725)
Fixed overheads (8,250) (11,450)
Operating profit 9,003 1,645
I recommend that we move from our traditional absorption costing system to that of activity based
costing (ABC) in order to better understand our costs and to introduce an appropriate strategy to
turn around our business performance.
Specifically, we should ensure that we incorporate both product and customer costing into our ABC
analysis to determine our profitable and unprofitable products and customers.’
Jamal Satter has seen the report and has angrily confronted Farid. ‘We are in a period of increased
competition and have successfully managed to grow our sales in difficult times. We even managed to
fulfil some special orders with very short lead times. We should be celebrating these successes, not
treating them as poor performance. We should expect some fall in profitability as our customers are able
to shop around, so we have to make our products and our prices more attractive to them. The new
costing system that you are proposing will just be a paper exercise for you to criticise the efforts of the
sales and production teams. I will do everything I can to stop the introduction of this costing system.’
It is clear that the business controller and the sales manager have different opinions about the
current performance of the company.
Required:
Analyse the data shown in Table 1, suggesting possible reasons why performance may not be as
positive as that portrayed by the sales manager. 10

Page 4 of 5
4. (a) A UK company owes a US supplier $ 2,000,000 payable in July. The spot rate is £1=$1.5350-
1.5370 and the UK company is concerned that the $ might strengthen.
The details for $/£ £31,250 options (cents per £1) are as follows:
Premium cost per contract
Calls Puts
Strike price June July August June July August
147.50 6.34 6.37 6.54 0.07 0.19 0.50
150.00 3.86 4.22 4.59 0.08 0.53 1.03
152.50 1.58 2.50 2.97 0.18 1.25 1.89
A strike price of 147.50 correspondents to an exchange rate of £1 = $1.4750.
Required:
Show how traded currency options can be used to hedge the risk at 1.525. Calculate the sterling
cost of the transaction if the spot rate in July is:
(a) 1.46 – 1.4620
(b) 1.61 – 1.6120 16
(b) Passion Jeans Limited, a company based in the UK, imports and exports to the USA, on 01,
May it signs three agreements, all of which are to be settled on 31 October.
1. A sale to a US customer of goods for $205,500
2. A sale of another US customer for £550,000
3. A purchase from a US supplier for $875,000
On 01, June the spot rate is £1 = 1.5500-1.5520 $ and the October forward rate is at a premium
of 4.00-3.95 cents per pound. Sterling futures contracts are traded at the following prices:
Sterling futures (IMM) Contract size £62,500
Contract settlement date Contract prices $ per £1
Jun 1.5370
Sep 1.5180
Dec 1.4970
Required:
(i) Calculate the net amount receivable or payable in pounds if the transactions are covered on
the forward market. 3
(ii) Demonstrate how a futures hedge could be set up and calculate the results of the futures
hedge if, by 31 October, the spot market price for dollars has moved to 1.5800-1.5820 and
the sterling futures price has moved to 1.5650. 6

Page 5 of 5