Examiners' report - December 2003
Module B, Paper DB2 (project)
Incorporating subject areas:
- Financial Strategy
- Risk Management.
General comments
On the whole, projects were well-presented and well-structured. Most candidates showed an understanding of the topics although some struggled with the computational elements. It was unfortunate that a significant number of candidates did not answer the questions posed and so the opportunity to gain marks was lost. The importance of reading the instructions carefully was highlighted in the report for June 2003 but obviously needs to be highlighted again.
Section 1 - Financial Strategy
The case study on which the questions for this section were based concerned a company, Kerria Carpets plc, which was planning to expand its operations.
Part (a) carried 30 per cent of the total marks awarded for the question and required candidates to produce an estimate of how much the company would have to raise in order to finance the expansion plan. This part was not generally well-answered and many candidates struggled with the computations required. In a number of cases, the answers provided focused on the incremental cash flows arising from the expansion plans rather than the total cash flows generated by the company. In some cases, the cash flows were discounted, although the rationale for this was not clear. There were candidates, however, who obtained maximum marks for this section. Some of the spreadsheet analysis was of excellent quality and was well-presented, with assumptions clearly stated. Part (b) carried 14 per cent of the total marks for the section and required candidates to identify and discuss any issues that may arise as a result of funding the expansion programme by an issue of debentures.
On the whole, this part was answered reasonably well with most candidates managing to gain good marks. However, some of the answers provided were confined to general remarks concerning the advantages and disadvantages of debenture issues and more marks could have been gained by considering the debenture issue within the context of the information provided in the case study.
Part (c) carried 10 per cent of the total marks for the section and required candidates to suggest an alternative approach to borrowing than that of the proposed debenture issue. Although the majority of candidates made a reasonable stab at this part, a surprising number of candidates failed to answer the question posed. An alternative form of borrowing needed to be identified and discussed. However, many answers suggested either an issue of equity shares or an issue of preference shares. In other cases, a number of possible methods of borrowing were suggested rather than a single alternative as required.
Part (d) required an evaluation of the expansion strategy using NPV analysis and accounted for 30 per cent of the total marks. This part was not always done well. Many failed to correctly identify the incremental cash flows from the expansion and in some cases the discount period was for a period of five or six years rather than over the life of expected benefits and costs. Nevertheless, some candidates displayed their analytical and spreadsheet skills and provided excellent answers to this part.
Part (e) accounted for 16 per cent of the total marks and required a consideration of how the assumptions and forecasts in the case study might be tested. This part was rarely done well. There was, again, a tendency to make general points, such as the need to use sensitivity analysis to test assumptions. However, more marks would have been gained if specific assumptions relating to the case study were identified and there was a discussion about the kind of reality checks that may be used to test their validity.
Section 2 - Risk Management
The case study on which the questions for this section were based concerned a consultancy company that wished to develop a framework of analysis that could be used to evaluate a board of directors of a listed company on an annual basis. Some elements of a framework were provided to help candidates, although they were free to add or subtract from the list of elements provided.
Part (a) accounted for 50 per cent of the total marks for this section and required candidates to prepare a framework for appraisal of the board of directors. This was often done well, with most candidates managing to achieve a pass mark for this part. However, the emphasis of the frameworks provided tended to be on matters relating to compliance with various rules and guidelines found in corporate governance reports.
When appraising a board of directors, attention must be given to matters relating to financial performance, which was not always done. Once again, there was evidence that candidates did not read the instructions carefully. As part of this answer, candidates were required to provide a brief rationale for each element used in the framework and to cite the evidential base for making an assessment. However, in a significant number of cases, one or both of these requirements were not addressed.
Part (b) also accounted for 50 per cent of the marks and required candidates to apply the framework that they had developed to Marconi plc. Candidates were provided with a copy of the annual report and accounts for the year to 31 March 2002 as the basis for doing this. This part was generally not as well-attempted as part (a). There was little evidence that candidates had got to grips with the issues and problems faced by the business. The company was at risk of failing in 2001/2 and had suffered huge losses during the financial year to 31 March 2002. However, these issues were often dealt with in a superficial manner and the main focus was on compliance matters such as board composition and attendance at meetings.