STRATEGIC BUSINESS MANAGEMENT
Time allowed – 3 hours
Total marks – 100
[N.B. – The figures in the margin indicate full marks. Questions must be answered in English. Examiner will take
account of the quality of language and of the manner 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. GPL is a long-established divisionalised company with its origins in shipping. The company has
been in existence for nearly 120 years and has developed a reputation for reliability and quality
service. The shipping activities in which GPL is engaged in comprise four divisions -cruise, ferry,
container and bulk shipping. The cruise division is engaged entirely in the carriage of passengers
and the ferry division carries passengers and vehicles. The vehicles carried by the ferries range
from motor cars to articulated trucks and buses. The container and bulk shipping divisions are
engaged in the carriage of freight only. The company has stated over recent years that it aims to:
1. Increase its international business to achieve long-term profitability.
2. Provide the necessary capital investment to support its international operations.
3. Train and develop the company's employees.
Environmental and Safety policy
Pressure on GPL for better environmental performance is coming from many quarters. The
company recently implemented an environmental and safety policy, which is monitored through an
audit system, in an effort to ensure that its policies are being executed. It is the aim of the company
to have operational standards which match with the best industry’s standard. Training of
management, staff and specialist auditors is seen as a priority within the organization’s
environmental and safety policy. This has become a major concern for the company, because of
customer anxiety about the safety of the ferries.
Financial results
In the last financial year, earnings per share was BDT 2.12 producing a dividend cover of 1.15
times. The dividend per share paid by GPL has remained at the same level for five years.
Comparative values for divisional revenue and operating profit are shown in table 1.
Table 1: Divisional Financial Data
Cruise
Tk. Mn
Current year revenue
5136
Previous year revenue
4410
Current Year Op Profit
780
Previous year Op Profit
528
Assets/Capital Employed
2800
Ferry
Taka Mn
4002
3756
650
480
2500
Container
Taka Mn
7572
6306
252
240
3200
Bulk shipping
Taka Mn
750
672
(30)
(18)
3800
During the year, general inflationary levels in the shipping industry was 12% per annum. The
company’s cost of capital is 15%.
Extract from the Chairman's statement for the financial year.
In his statement, Mr. Golam Rahman, the Chairman of GPL, commenting on revenue and profit
before the inflation adjustment, said the company achieved encouraging results, particularly in the
cruise division. The company had taken delivery of a new cruise liner, at a cost of BDT 120 MN
and has two more on order. Rahman believed that this was an expanding market and considered the
company to be in a good position to take advantage of the opportunity. With regard to the ferry
division, Rahman expected continued growth, although there was an expectation of potential new
entrants due to increased cargo volumes. This contrasted with his view of the declining
performance of the container and bulk shipping divisions as shown in table 1.
Market information
The results of a research commissioned by GPL indicated that, in recent years, within the cruise liner
industry, there has been a change in customer appeal. Traditionally, the main customer base had
comprised of traders. In the last five years, the cruise division has experienced an increase in its clientele
especially holiday makers. This stemmed from the promotion of domestic tourism. Furthermore, the
research showed a 15% increase in marine transport but GPL’s market share actually reduced by 4%.
The report indicates that the probability of the cruise market continuing to grow was bright. However,
there were uncertainties about the future potential of the container and bulk shipping division.
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Requirements:
a) Identify the ways in which GPL’s concern for environmental and safety policy can impact on
its performance.
b) The Chairman of the company has recently attended a short course on strategic planning. He
was particularly interested in the relevance of mission statements to the strategic management
process. Explain the ways how a mission statement is relevant in strategic management.
c) Calculate the current return on investment (ROI) and residual income (RI) for each division for
the current year. Assess the performance of each division and advise the management of GPL.
d) With reference to Porter's five competitive forces model, assess the nature of the cruise and
ferry shipping market in which GPL is engaged.
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2. (a) Expansion by organic growth or by acquisition should only be undertaken if it leads to an
increase in the wealth of the Shareholders.
Requirements:
(i) Discuss two strategic issues that arise from pursuing growth through mergers and acquisitions.
(ii) Discuss two strategic issues that arise from pursuing growth through organic growth.
(b) The market price of shares of Omeca Ltd. Tk. 2.20 per share and its price- earnings (P/E) ratio
is 15 times. The company issued 10 million ordinary shares of Tk.1.00 each. Omeca Ltd. is
considering the takeover of Cosco Ltd. The current market price of Cosco Ltd. is Tk. 3.30 per
share and it has 4 million outstanding shares in the market. The price-earnings (P/E) ratio of
Cosco Ltd. is 10 times. Omeca Ltd. expects to be able to purchase the shares at their current
price and will pay for them with an issue of its own shares valued at their current price.
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Omeca Ltd. wishes to know how many shares to offer for each of Cosco Ltd.’s shares and the
effect of the takeover on Omeca Ltd.’s reported earnings per share and share price.
Required:
Evaluate the favourability of this takeover and comment on your computations.
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(c) Next Ltd. is trying to improve its cash management. The accounts receivable turnover period
was average 80 days (average) sales and inventory turnover period was 60 days (average). Next
Ltd. used to pay their supplier in every 25 days (average) after receiving the bill. The company
expects to spend Tk. 1,800,000 during the next year on purchasing materials & office supplies.
Requirement:
Comment on the operating cycle & cash cycle of Next Ltd. and advice the management on cash
turnover and average cash balance for smooth operations of Next Ltd.
3. PTL is a well- established company which is providing telecommunications services both
nationally and internationally. Its business has been concerned with telephone calls, the provision of
telephone lines and equipment, and private telecommunication networks. PTL has supplemented
these services recently by offering mobile phone, which is an expanding market worldwide
The company maintains a diverse customer base, including residential users, multi-national
companies, government agencies and public sector organizations. The company handles
approximately 100,000 million calls each working day, and employs nearly 140 personnel.
Strategic development
The Chairman of PTL stated within its latest Annual Report that there were three main areas in
which the company aimed to develop in order to remain a world leader in the telecommunications
market, which are:
 Expansion of the telecommunications business in the national and overseas markets, both by
the company acting on its own and through partnership arrangements with other suppliers
 Diversification into television and multi-media services, providing the hardware to permit
telephone shopping from home and broadcasting services
 Extension of the joint ventures and strategic alliances which have already been established with
companies in South East Asia.
The Chairman explained that the company is intent on becoming a world leader in communications.
This will be achieved through maintaining its focus on long-term development by improving its
services to customers, developing high quality up-to-date products and being innovative, flexible
and market-driven. His aim is to deliver a world-class service at competitive cost.
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Financial information
The following comparative statistics show extracts from the company’s financial performance in its
national telecommunications market over the last two years:
Revenue/Turnover
Profit before interest and tax
Capital employed
Last year
Taka Mn
16,613
3,323
22,150
Previous year
Taka Mn
15,977
2,876
21,300
The company estimates its cost of capital to be approximately 13%. The Chairman expressed
satisfaction with the increase in turnover and stated that cost efficiencies were now being generated
following the completion of a staff reduction programme. This would assist the company in achieving a
target return on capital employed (ROCE) of 20% in this market over the next three years.
Business opportunities
The Chief Executive of PTL has stated that the major opportunities for the company lie in the
following areas:
 Encouraging greater use of the telephone
 Provision of advanced services, and research and development into new technology, including the
internet and systems integration
 The increasing freedom from government control of worldwide telecommunication services.
An extensive television and poster advertising campaign has been used by the company. This was
in order to penetrate further the residential market segment by encouraging greater use of the
telephone with various charging incentives being offered to residential customers.
To further the objective of increasing long-term shareholder value, the company is actively
considering an investment of Taka 200 million in each of the next three years in new technology
and quality improvements in its national market. Because of its specialist technical nature, the
investment is not expected to have any residual value at the end of the three-year period.
Following the investment, the directors of PTL believe that its rate of profit before interest and tax
to turnover in its national telecommunications market will remain constant. This rate will be at the
same level as last year for each of the three years of the investment.
Markets and competition
The company is currently experiencing an erosion of its market share and faces increasingly strong
competition in the mobile phone market. While PTL is the leader in its national market, with an
85% share of the telecommunications business, it has experienced a reduced demand for the supply
of residential lines in the last five years as competition has increased. The market for the supply of
equipment in the national telecommunications market is perceived to be static. The investment of
Taka 200 million in each of the next three years is estimated to increase PTL’s share of this market
to a level of 95%. The full improvement of 10% is expected to be received by PTL next year, and
its market share will then remain at this level for the full three-year period. It is anticipated that
unless further investment is made after the three-year period, PTL’s market share will revert to its
current level as a consequence of the expected competitive response
Industry regulation
The government has established an industry regulatory organisation to promote competition and
deter anti-competitive behavior.
As a result of the activities of the regulator and aggressive pricing strategies, it is anticipated that
charges to customers will remain constant for the full three-year period of the new investment.
All cash flows can be assumed to occur at the end of the year to which they relate. The cash flows
and discount rate are in real terms.
Future outlook
The business still remains under family control, but the board is considering an expansion programme
for which and that the family would need to raise Taka 200 million in equity or debt finance. One of the
possible risks of expansion lies in the fact that the market for fixed telephone lines is falling. New
income is being generated by expanding the product range to include mobile money transfer. The key to
profit growth for PTL is the ability to generate sales growth, but the company recognizes that it faces
stiff competition from large telecom companies in respect of the prices charged.
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In planning its future, PTL is advised to look carefully at a number of external factors which may
affect the business including government economic policy. In recent months the following
information has been published in respect of key economic data:
i)
Bank base rate has been reduced from 14% to 12%, and the forecast is for a further 0.5%
reduction within six months.
ii) The annual rate of inflation is now 8%, down from 10% in the previous quarter, and 12% 12
months ago. No further falls in the rate are expected over the medium term.
iii) Personal and corporate tax rates are expected to remain unchanged for at least twelve months
Requirements:
a) Explain the nature of the political, economic, social, and technological forces which will
influence PTL in developing its business and increasing its market share.
b) Apply Ansoff’s Product/Market Growth matrix to assess the extent of the potential market
development opportunities available to PTL.
c) Explain the relevance of each of the items of economic data stated in “future outlook” of PTL.
d) Explain whether PTL should continue with its expansion plans. Clearly justify your argument
for or against the expansion.
e) Outline the ways whereby PTL can obtain quotation for its share on the Dhaka Stock Exchange.
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4. (a) The transfer pricing method to be used for an intermediate product between two divisions in a
group is under debate. The supplying division wishes to use actual cost plus a 25% profit markup. The receiving division suggests the use of standard cost plus a 25% profit mark-up. A
suggested compromise is to use revised standard cost plus 25% profit mark-up. The revised
standard cost is arrived at after taking into account the appropriate elements of a planning and
operational variance analysis at the supplying division.
Discuss the impact of each of the above transfer pricing methods and their acceptability to the
supplying and receiving divisions.
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(b) Keya Limited will need to borrow USD 50 million in three months’ time for a period of six months.
The company is concerned that interest rates are expected to rise over the next few months.
Interest rates and forward rate agreements (FRAs) are currently quoted as follows:
 Spot 5.75% – 5.50%
 3 – 6 FRA 5.82% – 5.59%
 3 – 9 FRA 5.94% – 5.64%
Requirements:
i. Explain how a forward rate agreement (FRA) may be useful to the company. Illustrate this on
the basis that interest rates (i) Rise to 6.50% (ii) Fall to 4.50%
ii. Compare the use of interest rate futures with FRA in this instance
iii. Explain how interest rate guarantees or short-term interest rate cap could be used.
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(c) Audit firms have been criticized over the years by the public whenever they have any financial
or operational crises in terms of capital market or initial public offerings, etc. The potential
liability of auditors has also become an important topic in recent years due to the growing
complexity of business and legal environment. Financial Reporting Council has been formed to
oversee the auditor’s professional works and accounting and reporting quality of the public
interest entities (PIEs) in Bangladesh. FRC will take legal actions against auditors or
professional accountants in case they failed to comply with the IAS/IFRS/ISA as issued by
FRC or any breach of laws. One reason put forward to explain the high number of legal actions
against auditors is the “expectation gap”.
Requirements:
i) Explain “expectation gap” and describe its THREE main elements.
ii) Discuss the strategies that could assist in closing the expectation gap.
iii) Explain briefly the concept of professional skepticism.
iv) Evaluate the importance of professional skepticism in the audit of financial statements.
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