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Incorporating subject areas:
Financial Strategy
Risk Management.

The pass rate for this sitting was satisfactory, with the majority of candidates achieving a pass standard. Few projects, however, were of a very high standard. The problem, once again, was the failure of many candidates to adopt a more thoughtful approach to the issues raised. Previous reports have highlighted the problem that candidates often do not address the particular circumstances described in the project. Principles or points that are made should be developed within the context of the case study and reliance on general, or vague, points should be avoided. Unless candidates demonstrate a clear focus on the particular problems and issues raised, high marks cannot be achieved.

SPECIFIC COMMENTS
The case study, upon which the questions were based, concerned a football club, Barchester Rovers, which is listed on the London Stock Exchange. The club is experiencing problems – both on and off the pitch – and has been identified as a possible takeover target. A consortium, led by a successful business man, has plans to buy the club and to invest heavily in new players and in developing the property portfolio. The consortium plans to exit from the club after five years.
Part (a) carried 30 marks out of 100 marks for the whole project and required candidates to calculate expected profits and cash flows for each year of the proposed five-year investment period, based on different assumptions as to when the club would regain a place in the Premier league.
This part was done reasonably well by most candidates, and a few gained very high marks. When preparing the income statements, candidates often struggled with the depreciation and amortisation calculations. The calculation of the loss on sale of sale of players and the treatment of the government grant received in respect of the proposed property development also caused problems. 
When preparing the cash flow statements, the working capital adjustments, and the omission of the loan repayment and sale of the shares in the club at the end of the five-year period were common errors. Surprisingly, the timing of the property development costs and payments to acquire new players also created problems for some candidates.

Generally, workings were shown and assumptions were clearly stated and so it was possible to trace the source of any errors. In some cases, however, candidates did not show their workings and, where errors were made, were penalised as a result.
Part (b) carried 12 marks and required candidates to calculate the maximum price that the consortium would be prepared to pay to acquire the shares of the club, based on different assumptions as to when the club would regain a place in the Premier league.
This part was rarely done well. Although most candidates discounted the future cash flows that were calculated in the answer to Part (a), the estimated selling price of the shares at the end of the five-year investment period was often omitted. As a result, share values were significantly understated. In addition, many candidates failed to discount the cash flows correctly. Those occurring at the end of the first year of the investment were often treated as being received immediately (and therefore not discounted). Subsequent years were also discounted incorrectly because of this timing error.
Some candidates calculated a share price based on balance sheet values, for which some credit was given. In addition, some used the price-earnings ratio to calculate a share value. However, the reasoning behind the figures used often did not bear close scrutiny.

Part (c) carried 15 marks and required candidates to provide an assessment of the forecast financial performance and likely financing needs of the club for the five-year investment period and to suggest a share price for the proposed takeover.
Although candidates were specifically asked to use information produced in their answers to Parts (a) and (b) when answering this part, a significant number failed to do so. This failure to draw on information already produced often led to weak answers. Likely financing needs, for example, could have been easily identified from the cash flow statements that had already been produced. It was a relatively simple matter to calculate the cumulative net cash outflows occurring in the early years to arrive at an overall figure for the club’s financing needs, based on different assumptions regarding the timing of promotion to the Premier league. Instead, however, many candidates ignored the cash flow information and simply identified the large items of expenditure that were planned in the future.

Part (d) carried 20 marks and required candidates to identify and discuss the information that an independent firm of accountants should gather to assess the risks and problems associated with the club and the proposals that the consortium had for the club.
This part provided some good answers and it was clear that a minority of candidates had thought hard about the issues raised. Too many candidates, however, treated this part in a rather mechanical way and produced a ‘textbook’ answer based on general points relating to takeovers. The particular context and issues surrounding this proposed takeover were largely ignored. Inevitably, this failure to use the information in the case study resulted in a failure to gain high marks.
Some candidates appeared to misread the question. The answer should have addressed the sources of information relating to risks and problems rather than how the risks and problems should be managed.

Part (e) carried eight marks and required candidates to discuss the risks of making the existing chief executive the chairman of the reconstituted board and to say how these risks should be managed.
This part tended to produce either good answers or very weak answers. The good answers, again, drew on the information in the case study and highlighted the possible tensions that might exist between the new chairman and new chief executive. Weak answers tended to make general points concerning the need to separate the two roles and to simply raise the point that a chief executive should not go on to become a chairman of the same company, without elaborating as to why this is considered bad practice.

Part (f) carried 10 marks and required candidates to outline the advantages and disadvantages of a football club obtaining a listing on the London Stock Exchange.
This part was usually well answered with many candidates scoring high marks. However, a significant number of candidates failed to relate the points made to the context of a football club. In particular, the potential conflict between shareholder wealth enhancement objectives and sporting objectives was an issue that required consideration.

Part (g) carried five marks and required candidates to identify other exit strategies (apart from a flotation on the London Stock Exchange) that the consortium might consider at the end of the five-year investment period.
Most candidates made a reasonable attempt at this part, although there were very few good answers. As a number of Premier league football clubs have recently been taken over by wealthy individuals, it was not surprising that most candidates identified this as a possible exit route. However, other forms of exit identified were less credible. A significant number of candidates, for example, suggested that Barchester Rovers could be taken over by another football club.