Projects

Diploma in Financial
Management
Issue date: August 2010
Closing date for submission: 30 November 2010

The Association of Chartered Certified Accountants

2
CONTENTS
Page

Project Guidelines 4

Module A Project 9

Module B Project 19

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PROJECT GUIDELINES FOR THE DIPLOMA IN FINANCIAL MANAGEMENT
This section contains guidance on submitting the projects which are part of the Diploma in Financial Management (DipFM)
qualification. It includes details of such important areas as submission deadlines, presentation and ACCA’s rules on
cheating and plagiarism. This section should be read carefully before you start the projects.

The project requirement for the Diploma in Financial Management

Candidates are required to submit two projects of 100 marks each as part of the DipFM qualification – one for Module A and
one for Module B.

The subject areas covered in the Module A project are:

• Interpretation of Financial Statements
• Performance Management

The subject areas covered in the Module B project are:

• Financial Strategy
• Risk Management

Please note
For the purpose of completing the examination entry form, the project codes are as follows:
Module A – DA2
Module B – DB2

In order to pass a module, candidates must complete and pass each element of the module – that is, the project and the
examination – with a mark of 50% or above. A good mark in one element cannot compensate for a failure in the other
element.

Project submission
1 Before being allowed to submit either project, a candidate must be a registered ACCA student and have paid the
necessary course fees for the DipFM.

2 Candidates must declare their intention to submit a project by completing the appropriate examination entry form and
returning it to ACCA by the specified closing date. You can also indicate your intention to submit by logging on to
ACCA’s e-business website https://www.acca-business.org/. Projects received from candidates who have not
indicated their intention to submit will not be accepted.

3 If a candidate has declared an intention to submit a project in a particular period, having paid the appropriate fees,
and does not submit the project in that period, no refund of fees will be given.

4 Candidates must submit only those projects which are current and valid for the particular period in question. Projects
written on topics for previous periods, whose deadline dates have passed, will not be accepted or marked.

5 Submission dates
There are two submission dates during the year, which are as follows:
Projects issued in February To reach ACCA no later than 31 May
Projects issued in August To reach ACCA no later than 30 November

Submission dates should be strictly adhered to, as no projects will be accepted after the final submission date for
that project. Projects may only be submitted once during the period in question. Any additional project submissions
will not be valid and will not be marked. ACCA will only mark the original submission, therefore it is very important
that projects are checked very carefully before they are submitted.

4
6 The completed projects should be submitted to ACCA, Department PPQ, 2 Central Quay, 89 Hydepark Street,
Glasgow G3 8BW.
Please clearly mark your envelope DIPFM PROJECT. It is advisable for candidates to return their completed projects
by recorded delivery or registered post and to retain evidence of postage. ACCA cannot be held responsible for
completed projects which are lost in transit.

7 Receipt of completed projects will be acknowledged automatically by e-mail or letter. Please ensure that your correct
e-mail address is held on record. Addresses can be updated through the e-business web site on
https://www.acca-business.org/

Writing your project

1 Project presentation
Unless a question requires a particular format – for example, a report or a memo – projects may be presented in
whichever format appears to be most suitable. The main concern should be to choose a format which is most helpful
in supporting your analysis, arguments and conclusions. Projects must be written in English.

2 Number of questions
No project will have more than eight questions in total, with no one question exceeding 50 marks.

3 Word count
The maximum word count for each project is 5,000 words, including appendices and tables, but excluding table of
contents, references and bibliography. Candidates should note that, in projects where slides are required, the word
content of the slides must be included in the final word count. All appendices should be cross-referenced to the main
body of the project. Please note that when entering tables of figures six figures should be counted as one word. The
word count for each particular question should be shown clearly at the end of that question. Candidates whose
projects exceed 5,000 words will be sent an e-mail automatically, informing them that the project will be marked
up to the 5,000 word limit, with the excess being ignored by the marker. They should be warned that any future
failure to adhere to the project word limit will result in the project in question being automatically failed. This
policy applies to ALL candidates who have exceeded the word limit, regardless of the extent of the excess.

4 Presentation guidelines
Projects should be submitted on A4 paper, with your student number, project name, date and page number (for
example, 0123456, Module A project, May 2002, page 1) at the top of each page. Projects must be typed in black
ink, one-sided, double-spaced using a minimum 12-point font size and a 1-inch margin at each side. Hand-written
submissions will not be accepted.

Candidates must complete a Project Submission Form for each project submitted, which should be attached to the
front of the project. Care should be taken that the correct pre-printed student registration number is displayed on the
Project Submission Form, together with the total word count of the project (which should, of course, match the total
word count displayed for the individual questions in the body of the project). Candidates will also be required to state
on the form the total number of pages being submitted, which will act as a cross check when the projects are received
by ACCA to ensure that all pages have been received. The project document should be held together by a single staple
placed in the top left hand corner. The submission sheet should be placed separately on top.

A hard copy of the completed project should be submitted to ACCA, Department PPQ, 2 Central Quay, 89 Hydepark
Street, Glasgow G3 8BW for marking. Candidates must retain a copy of each project submitted for reference and
security purposes. Candidates should note that projects MUST NOT be submitted electronically.

5 [P.T.O.
5 References and bibliography
In the course of writing each project, it may be necessary to refer to course material, web sites and other publications
in order to cite references to support the answer being given. Such citations should be made in a uniform style, with
the author’s name and date of the publication in your text and an alphabetic list of references at the end of the project.
For example:
• In the text: (Monks and Minow, 2001)
• In the list of references: Monks, R A G & Minow, N (2001) Corporate Governance (2nd edition), Blackwell

How are projects marked?

The pass mark for each project is 50%. When the projects are being marked, skills in six key areas are assessed:

• Presentation
The projects should be logically organised and clearly expressed. They should be accurate in terms of spelling,
grammar and punctuation.

• Knowledge
Candidates should demonstrate a comprehensive knowledge of the areas being tested.

• Numerical analysis
The study of Annual Reports or financial appraisals will inevitably require numerical analysis. If required to perform
ratio analysis, for example, candidates should state clearly the ratios they are using, with the relevant formulae. The
main emphasis in most cases, however, will be on candidates’ ability to interpret and analyse results, rather than on
their ability to perform a large number of calculations.

However, at least one question in each project will usually require some form of arithmetic calculations. Although,
as mentioned above, emphasis will often be placed on the ability to interpret and analyse results, candidates should
show competence in calculations, avoiding errors due to inaccurate rounding or mis-specification of equations (for
example, putting brackets in the wrong place).

Marks will not be awarded for careless arithmetic or inappropriate analysis and interpretation. However, marks will
be given for feasible assumptions and explanations. Candidates should take care not to simply include numbers
without allowing the marker to see where the numbers came from. Candidates should avoid leaving numbers with
an unnecessary number of decimal places.

• Critical evaluation
Candidates should be able to analyse situations using appropriate techniques, models and frameworks. Candidates
should demonstrate the ability to take raw data and synthesise these to support the decisions and recommendations
within the project.

• Real-life examples
Where appropriate, credit will be given to candidates who cite real-life examples which are relevant to the areas being
tested. This may reflect the candidate’s own experiences or be found in the financial press, relevant publications and
web sites.

• Conclusions
Conclusions should follow logically the evidence contained in the main body of the question. They should be stated
clearly and concisely.

The marks attached to each of these areas will vary for each project.

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Obtaining project results
Project results – regardless of when the project is submitted in a particular period – will be issued at the same time as the
examination results for the period in question. Results will be issued as follows:

For projects submitted by 31 May August (with the results for any exams taken in June)
For projects submitted by 30 November February of the following year (with the results of any exams taken in December)

Cheating and plagiarism

Cheating is a deliberate and intended action, using trickery, practising deceit, or violating rules dishonestly. For the
Diploma in Financial Management, ACCA requires that projects are a reflection of the candidate’s own work, own ideas
and own words. Any of the following acts would lead to a candidate failing a project and would likely result in the
candidate being removed from the programme:

• Impersonation – this means to undertake a piece of assessed work on behalf of, or to pretend to be, another student,
or allowing another person to undertake an assessment on your behalf, or pretend to be you.

• Substitution – this means submitting other people’s work as though it were your own – either with, or without, their
knowledge.

• Duplication – this means submitting work for assessment that is the same as, or broadly similar to, work submitted
earlier for academic credit, without acknowledgement of the previous submission.

• Falsification – this includes the invention of data, their alteration, copying data from any other source, or otherwise
obtaining them by unfair means, or inventing quotations and/or references.

• Collusion – this is a secret agreement or co-operation with others, especially for a deceitful purpose, and includes
copying or sharing another candidate’s work, with his/her secret agreement that you can do so, or lending your work
to another candidate in the reasonable knowledge that some or all of it will be copied, or secretly working with others
jointly to produce a piece of work that is supposed to be your own work.

• Plagiarism – this means taking or using another person’s thoughts, writings or inventions and presenting them as
though they were your own.

To acknowledge the work of others is more than a matter of good academic practice – it is the foundation stone of all
academic practice. This is why so much attention is placed on correct referencing, and why candidates may find
themselves unwittingly guilty of plagiarising because they have failed to follow the correct referencing procedures.
Ignorance, however, is no excuse and plagiarism will be heavily penalised as it is viewed as a serious matter of cheating.

Plagiarism is not a complicated issue – if you quote/use the actual words of another author, or if you express the thoughts
of an author in your own words, and you do not indicate (a) that you have done so, and (b) where those words or thoughts
can be found in published form, then you have plagiarised.

The website http://sja.ucdavis.edu gives a very readable set of examples of what is plagiarism and what is not – with a
few tips on how to deal correctly with attributing the work of others.

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Summary
Each project must be submitted by the appropriate deadline (31 May or 30 November), and may only be submitted once
during the relevant period. Any project submitted beyond the appropriate deadline will not be marked.
Each project must:

• Be your own work

• Be 5,000 words or less or the project will be deemed to have failed
• Be written in English
• Adhere to the presentation requirements included in section 4 of ‘Writing your project’
• Be accompanied by the Project Submission Form, completed with your own details

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 Module A
Paper DA2 – Incorporating subject areas:
– Interpretation of Financial Statements
– Performance Management

Diploma in Financial
Management

All questions are compulsory and MUST be answered.

The project MUST be written in English.
The maximum word count (including appendices and tables but
excluding table of contents, references and bibliography) is 5,000.
The project MUST be TYPED in black ink, one-sided, double-
spaced, using a minimum 12-point font size and a 1-inch margin
at each side. HANDWRITTEN SUBMISSIONS WILL NOT BE
ACCEPTED. The project must be submitted by post; electronic
submissions are not acceptable.
The project should be submitted on A4 paper with your student
number, project name, date and page number at the top of each
page.
A Project Submission Form MUST be completed for each project
submitted and attached to the front of the project.

The Association of Chartered Certified Accountants

Section 1 – Incorporating subject areas: Interpretation of Financial Statements and Performance Management.
THIS ONE question is compulsory and MUST be attempted

1 Introduction
You have been asked to act as business advisor to a group of investors seeking to establish a new business. The
investors are planning to develop, manufacture and market a range of industrial safety products, and they wish to use
Halma plc as a benchmark in their planning. They have chosen Halma as a benchmark because of the strong link
between the company’s clearly expressed strategic goals and its financial performance, and they wish to achieve the
same strong link in their proposed business.
Halma plc
Halma is a FTSE 250 group of companies which develops, produces and sells products in three market sectors. The
common feature between the sectors is that the products provide protection to both individuals and physical assets.
The group is active in over 20 countries world-wide.
The group defines the sectors in which it operates and the focus of each sector as follows:
Infrastructure sensors – detecting hazards in buildings, providing protection for both assets and individuals in
buildings;
Health and analysis – improving public and personal health, as well as protecting the environment; and
Industrial safety – protecting assets and individuals at work in industry
The range of products in each of these sectors is:
Infrastructure sensors
Fire detection
Fire and smoke detectors and audible/visual warning devices.
Security sensors
Security sensors used in public and commercial property.
Automatic door sensors
Sensors used on automatic doors in public and commercial buildings.
Elevator safety
Elevator/lift door safety sensors, emergency communication devices, displays and control panels for elevators.
Health and analysis
Water
Products to monitor and find leaks in underground water pipelines, UV (ultra-violet) technology for disinfecting
and treating water.
Health optics
Handheld devices used to assess eye health, diagnose disease and assist with eye surgery as well as diagnostic
devices for general medical applications.
Fluid technology
Critical components such as pumps, probes, valves, connectors and tubing used by scientific, environmental and
medical diagnostic equipment for demanding applications.
Industrial safety
Gas detection
Portable instruments and fixed systems which detect flammable and hazardous gases.
Bursting disks
‘One time use’ pressure relief devices to protect large vessels and pipe-work in process industries.
Safety interlocks
Specialised mechanical, electrical and electro-mechanical locks which ensure that critical processes operate
safely.

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 Asset monitoring
Products for monitoring physical assets above ground and under water using innovative sensors and
communications technologies.
In April 2009, the quality of the group’s financial reporting was recognised when its 2008 Annual Report received
the ‘Best Strategy and Objectives by a FTSE 250 Company’ award in the UK’s Strategic Planning Society’s Strategic
Value in Corporate Reporting Awards.
The judges for this award noted that Halma set a ‘particularly high standard’ through ‘the clarity of its strategic thinking
and the apparent effectiveness of its strategic management’. The judges went on to comment that this adds value so
that the group is ‘worth considerably more than the simple sum of its parts.’
Issues noted by investors
Appendix 1 lists the financial measures which are highlighted in the group’s 2009 Annual Report, analysed into two
classifications. While some of these are what might be referred to as ‘traditional’ measures (as they would be included
in most textbooks on the subject and are widely used) there are a number of other measures. The investors are unsure
about why these ‘other’ measures are included in the Annual Report and whether any benefit would be gained by
using these financial measures to monitor the performance of the new business. Another feature of the measures
highlighted in the Annual Report is that, for a number of them, data is provided for a long time period – in some cases
since 1978. They have asked for guidance on the value of this information for their purposes.
As the investors have pointed out that they do not wish the performance of Halma to be assessed, the actual data
has not been included in Appendix 1. Their objective is to decide on whether the approach adopted by Halma could
provide a model that they could use in their proposed business.
Given that Halma has been recognised for the quality of its reporting, in particular the clarity of its strategy, the
investors have also asked you to comment on the importance of developing a clearly articulated strategy, and how
this can be used to monitor, control and improve performance. The strategic objectives of Halma are included at
Appendix 2.
The Chairman’s report is provided at Appendix 3. The investors have commented that much of the information
contained in this report is duplicated elsewhere in the Annual Report, and they have therefore questioned the value
of the report.
Strategic objectives
The stated strategy of Halma is to ‘create sustained shareholder value by operating in markets offering consistent high
returns and long-term growth’. This is to be achieved through both organic growth and acquisitions. Specific targets
for the 2009 financial year were:
– organic growth to exceed 5% per annum
– targeted acquisitions
– expand business in Asia
– continued management development
– maintain high rate of innovation.
Planning process for the new business
The investors have decided to enter one of the industry sectors in which Halma operates – infrastructure sensors. They
intend to focus on two product grouping – fire detectors and elevator sensors.
They recognise that it will take time to develop the wide geographical spread that Halma has achieved and therefore
the new business will concentrate on the markets in the European Union for the first three years of operation.
The directors have stated that they believe that one of the factors which contributes to Halma’s success is that there
is a clearly articulated strategy and performance measures. They believe that this will be central to the success of the
new business.
Therefore, they do not want decisions on strategic objectives to be rushed. Nor do they want the strategic planning
process to cause a delay in preparing budgets. They have asked you to prepare a cash budget for the first year of
operation, based on the assumptions set out in Appendix 4. Once this has been done, it is intended to prepare full
budgets for a three year period.

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Required:
Prepare a report to the investors which:
(a) assesses the arguments for and against including additional measures such as those noted in appendix 1 as
‘other’ measures in the annual report; (10 marks)

(b) discusses the usefulness of each of the measures noted in appendix 1 as ‘other’ measures when carrying out
an assessment of performance from the perspective of shareholders; (27 marks)

(c) explains the reasons for including a chairman’s statement in the annual report, and comments on how the
information in the statement of the chairman of Halma contributes to an assessment of the group’s
performance; (10 marks)

(d) discusses the suitability of Halma as a benchmark for the new business; (10 marks)

(e) includes a monthly cash budget for the first year of operation of the new business, based on the assumptions
in appendix 4; and (22 marks)

(f) discusses whether the proposed approach to budgeting and planning is likely to contribute to the success of
the new business. (15 marks)
Marks awarded for structure and overall quality. (6 marks)

(100 marks)

ACCA wishes to acknowledge the cooperation of Halma plc by kindly allowing information from the Group’s Annual
Report to be reproduced in this project.

Note to candidates:
Answers should primarily be based on the information provided in this document. While background reading may
be beneficial in helping candidates to demonstrate the ability to apply theory, extensive additional research is not
required.
Candidates should NOT contact Halma plc.

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 Appendix 1

Financial measures highlighted in Halma plc Annual Report for 2009

‘Traditional’ measures
Growth 2008 – 2009:
Revenue
total
per sector
Statutory profit before tax
Statutory earnings per share
Return on Capital Employed
‘Other’ measures
Growth 2008 – 2009:
Adjusted profit before tax (note 1)
Adjusted earnings per share (note 1)
Total dividend per share (note 2)
Return on total invested capital (note 3)
Return on total invested capital vs Weighted Average Cost of Capital (2000 – 2009)
Adjusted profit before tax (1978 – 2009)
Dividends paid and proposed (1978 – 2009)
Total revenue (1978 – 2009)
Return on sales (1978 – 2009) (note 4)
Research and development expenditure as a percentage of revenue (2005 – 2009)
Profit per sector as % of total profit (for 2009)
Organic revenue growth (2005 – 2009)
Organic profit growth (2005 – 2009)
Note 1
Amortisation of acquired intangible assets has been excluded from the calculation of adjusted profit before tax and adjusted
earning per share. The directors argue that this gives a more consistent measure of underlying performance.
Note 2
This represents the total dividend paid and proposed for each share.
Note 3
This is defined as:
post-tax return from continuing operations (before amortisation of acquired intangibles), as a percentage of shareholders’
funds plus:
retirement benefit accruals and obligations (net of deferred tax)
accumulated amortisation of acquired intangibles
goodwill amortised, taken to reserves and realised on disposals
Note 4
Adjusted profit before tax (as defined in note 1) from continuing operations as a percentage of revenue from continuing
operations.

13 [P.T.O.
 Appendix 2

Strategic objectives
(as stated in Halma’s Annual Report for 2009)
Our business is to make products which protect lives and improve the quality of life for people world-wide. We do this
through continuous innovation in market-leading products which meet the increasing demands for improvements to health,
safety and the environment. We build strong positions in niche markets where the demand is global. Our businesses are
autonomous and highly entrepreneurial.
Strategically we aim to grow profit and revenue in excess of 5% p.a. organically, to have Return on sales in the region of
18% or above and generate post-tax Return on total invested capital of more than 12%. As a result we are highly cash
generative and reinvest in our businesses through people, product and market development, continue to acquire more
companies with like characteristics, and strive to give annual dividend growth of 5% or more to our shareholders.
We aim to achieve high returns on invested capital and create sustained shareholder value.
We achieve sustainable competitive advantage by operating in relatively non-cyclical, specialised global markets. Our
chosen markets have significant barriers to entry for competitors, are underpinned by resilient growth drivers and must
offer the potential for high returns and strong long-term growth.
Our main strategic priority is organic growth. We aim to achieve this by adding value to our businesses and building market
leadership that provides high returns. In addition, we aim to acquire companies and intellectual assets that enhance our
existing activities.

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 Appendix 3

Chairman’s statement (taken from Halma’s Annual Report for 2009)

Thirty years of dividend growth of 5% or more per annum

Introduction
This financial year marks an historic milestone for Halma. Subject to shareholders approving the final recommended
dividend of 4·78p per share, an increase of 5% for the year, this will be the thirtieth consecutive year of dividend increases
of 5% p.a. or more, which we believe is a record for our sector.
I thought it might be useful to reflect on some of the important principles which have contributed to that performance over
the three decades.
– Firstly, we invest in companies with robust market drivers, making products which target non-discretionary spend
where it is difficult for competitors to get into the market and where value far exceeds costs thereby helping to drive
strong margins.
– Secondly, our management philosophy is to devolve responsibility for all aspects of performance to the individual
companies themselves. This keeps them close to their markets, understanding customer needs and driving strong
innovation where it counts – in the market.
– Thirdly, we standardise reporting and risk assessment across all companies.
– Fourthly, as a result, we produce good returns on total invested capital (this year 13·1%) and generate cash which
we use to finance dividends, and the balance we reinvest in the businesses themselves or invest in acquiring more
companies which meet these business criteria.
Reading this, you might think that all sounds rather obvious – why don’t more companies do it?
Some do. The difference perhaps is that we stick to it, because we believe it works. Take one example: surely we do not
need so many managing directors, finance directors and so on; why not consolidate dramatically and save swathes of cost?
The answer is that we could do and occasionally we will consolidate two or more companies. However, in the process of
consolidation, typically what happens is that everyone becomes internally focused, attention on the market reduces,
innovation falters and ground is lost (often permanently) all for a transient one-off cost saving. Having said that, we are
not frozen in time, we continually question the basics and change where needed. Some examples of this over the last few
years are:
Geographic markets
We have seen recently the strong emergence of the developing economies. However, if like many of our companies you
had little or no experience of operating there, where would you start? Our response was to set up hubs in China and more
recently India, to help our individual companies enter the market. In effect, making the water slightly warmer for them. As
a result, for example, we started with three and now have nineteen companies operating in China and last year our sales
there increased by 25%.
Innovation
The pace of change gets faster by the day and advances in technology are there to be seized.
Within the Group we have strong pockets of deep expertise in many domains and recognise that certain technologies and
techniques have applications across the Group in more than just the originating company. So this year we hosted an
innovation event to encourage the cross-fertilisation of ideas, which in turn we believe will increase the speed and
effectiveness of innovation across the Group.
People development
Our results are a function of the dedication, capability and quality of our people. Over the last few years we have
significantly increased our investment in training, running tailor-made programmes for our key people. Increasingly, we
have been looking to promote from within, which in turn improves the career prospects for all.
In summary, the Group has very strong, sound foundations which we continuously seek to improve without eroding them.
It is these values which have driven our performance consistently over three decades.

15 [P.T.O.
Halma: what we do and our strategy
Our business is to make products which protect lives and improve the quality of life for people world-wide. We do this
through continuous innovation in market-leading products which meet the increasing demands for improvements to health,
safety and the environment. We build strong positions in niche markets where the demand is global. Our businesses are
autonomous and highly entrepreneurial.
Strategically we aim to grow profit and revenue in excess of 5% p.a. organically, to have Return on sales in the region of
18% or above and generate post-tax Return on total invested capital of more than 12%. As a result we are highly cash
generative and reinvest in our businesses through people, product and market development, continue to acquire more
companies with like characteristics, and strive to give annual dividend growth of 5% or more to our shareholders.
Results
Unsurprisingly, the second half saw a weakening in our order intake (the detail is provided in Andrew Williams’ report1)
and action was taken, where necessary, across the Group to bring costs in line with new levels of demand. Nevertheless,
full year revenue from continuing operations increased 15·4% to £455·9m (2008: £395·1m) underlying organic revenue
growth was 10·7% with currency having a net impact of 8·2%, i.e. 2·5% organic growth at constant currency. Profit before
tax and amortisation of acquired intangibles on continuing operations was £79·1m (2008: £72·8m), an increase of 8·7%
and organic profit growth was 5·1%, at constant currency a decline of 3·3%. Statutory profit before tax increased 7·0%
to £72·8m. The Board is recommending a final dividend of 4·78p per share, an increase of 5%. Our dividend cover has
increased to 1·93 times (2008: 1·83 times). Return on total invested capital was 13·1% (2008: 14·1%).
Acquisitions and disposals
During the year we acquired Fiberguide Industries, which manufactures optical fibre cables and assemblies, for an initial
cash payment of $14m. We also purchased the business and assets of Oerlikon Optics USA Inc’s operation located in
Golden, Colorado, USA for $6m in cash, a business which designs and manufactures optical coatings and optomechanical
assemblies and which will operate as part of the newly created Ocean Thin Films, Inc. These two new businesses form
part of our Photonics sub-sector within the Health and Analysis sector. There were two very small disposals in the year.
Details are included in the Chief Executive’s review1 and Financial review1.
Governance
Other than Adam Meyers’ appointment to the Board at the beginning of the year and Keith Roy’s retirement at the 2008
AGM, there have been no changes at Board level during the year.
People
The second half in particular has been testing for all of us for the economic reasons which saturate our news channels
daily. In these uncertain times, people across the Group have reacted to adjust to the circumstances they find in the
markets. Often this has been difficult and trying.
I give my sincere appreciation and thanks to them all.
Outlook
Visibility in most of our markets is still limited. Different countries, sectors and products are at differing places in the
economic cycle. Therefore, we are encouraging all our management teams to react to their markets as they see fit, keeping
costs in line with order intake, but not cutting back on vital product investment. When we see improving demand, our
operational gearing should show through strongly. In the meantime, we will concentrate on delivering the high level of
returns and cash generation that have been the cornerstone of our resilience over 30 years.

Geoff Unwin
Chairman

1 These reports have not been included in the project as the detail they provide is not required by candidates.

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 Appendix 4

Assumptions for preparation of cash budget

Products
Two types of products will be manufactured and sold:
Fire detectors; and
Elevator sensors.
Production and sales volumes
The following volumes (in units) are anticipated:
Month Fire detectors Elevator sensors
Production Sales Production Sales
1 50,000 30,000 3,800 4,500
2 80,000 70,000 5,000 5,500
3 95,000 90,000 6,000 6,500
4 100,000 105,000 7,000 8,000
5 105,000 105,000 7,500 9,000
6 110,000 108,000 10,000 10,000
7 114,000 112,000 10,500 11,000
8 115,000 116,000 11,000 12,000
9 115,000 118,000 12,000 12,000
10 118,000 118,000 12,000 12,000
11 120,000 120,000 12,000 12,000
12 122,000 120,000 12,000 12,000
Selling price per unit
Fire detectors €4
Elevator sensors €40
There will be no change to these selling prices during the year.
Payments by customers
All sales will be subject to a credit period of 30 days. However, it is anticipated that only 65% of customers will adhere
to this, with a further 30% paying in 60 days and the balance in 90 days.
No default by customers is anticipated.
Costs
Fire detectors Elevator sensors
Direct materials (per unit) €1·75 €8·00
Direct labour (per unit) €0·90 €6·00
Manufacturing overheads:
as % of direct cost 30% 30%
Other overheads (excluding depreciation):
(as % of revenue)
Selling and distribution 1·95% 1·95%
Administration 10% 10%
Research and development 3% 3%
General 8% 8%
Raw materials inventory and credit terms
At the end of each month, sufficient raw material will be held to meet 14% of the demand in the following month.
Payment for raw materials will be made in the month following the purchase of the material.
All other costs will be paid in the same month as they are incurred.

17 [P.T.O.
Funding
The investors will introduce €6,000,000 as Share Capital, and a 10-year bank loan for €2,400,000 will be raised in
month 1.
No repayments on the loan will be required in months 1 to 6. From month 7 monthly capital repayments on the loan will
be made.
Interest payments will be made annually, commencing in month 13.
Capital expenditure
Non-current assets with a total value of €7,800,000 will be bought and paid for in month 1.
All non-current assets will be depreciated on the straight-line basis at a rate of 20% per annum.

End of Question Paper

18
 Module B
Paper DB2 – Incorporating subject areas:
– Financial Strategy
– Risk Management

Diploma in Financial
Management

All questions are compulsory and MUST be answered.

The project MUST be written in English.
The maximum word count (including appendices and tables but
excluding table of contents, references and bibliography) is 5,000.
The project MUST be TYPED in black ink, one-sided, double-
spaced, using a minimum 12-point font size and a 1-inch margin
at each side. HANDWRITTEN SUBMISSIONS WILL NOT BE
ACCEPTED. The project must be submitted by post; electronic
submissions are not acceptable.
The project should be submitted on A4 paper with your student
number, project name, date and page number at the top of each
page.
A Project Submission Form MUST be completed for each project
submitted and attached to the front of the project.

The Association of Chartered Certified Accountants

Section 1 – Incorporating subject areas: Financial Strategy and Risk Management.
This ONE question is compulsory and MUST be attempted

1 Matara Ferry Co
The Matara Ferry Co was established in 1910 to operate a ferry service across the mouth of the Matara estuary. The
ferry service links the town of Amesite, which has 85,000 inhabitants, to the much larger town of Garnet, which has
220,000 inhabitants. The ferry company was created by four wealthy Garnet businessmen and operated as an
independent company for more than half a century. In 1965, however, it experienced financial difficulties and was
taken over. It became a wholly-owned subsidiary of Bismuth Co, a large international transport business, and is still
owned by this company.
The ferry service is operated using two pontoon ferries carrying foot passengers and motor vehicles. The service
operates throughout the day, although the frequency of the service varies. At peak times, there is a ferry every
20 minutes. Each ferry crosses the estuary by pulling itself along a set of parallel chains. These chains sink to the
bottom of the estuary after the ferry passes so as not to interfere with other shipping. At the point of crossing, the
estuary is 850 metres wide and 35 metres deep at high tide and 710 metres wide and 28 metres deep at low tide.
The crossing takes approximately 8 minutes to complete.
The parent company, Bismuth Co, operates ferries, toll bridges, bus and rail services in several different countries and
its central management exerts tight control over the various operations. Although the management of Matara Ferry Co
is given day-to-day control over operational decisions, any strategic decisions, including those relating to pricing and
investments, are made by central management.
The draft financial statements of the Matara Ferry Co for the most recent year are set out below:
Income statement for the year ended 31 July 2010
$000
Revenue 2,800·5
Less
Salaries (920·4)
Maintenance (340·2)
Operations (1,056·5)
Administration (185·9)
Miscellaneous expenses (57·3)
––––––––
Profit before taxation 240·2
Tax –
––––––––
Profit for the year 240·2
––––––––
Statement of financial position as at 31 July 2010
$000
ASSETS
Non-current assets
Property, plant and equipment 12,300·5
Less depreciation 3,599·7
––––––––
8,700·8
––––––––
Current assets
Inventories 120·4
Cash 315·1
––––––––
435·5
––––––––
Total assets 9,136·3
––––––––

20
 $000
EQUITY AND LIABILITIES
Equity
$0·50 ordinary shares 4,000·0
Retained earnings 3,751·1
––––––––
7,751·1
––––––––
Non-current liabilities
8% Loan notes 1,000·0
––––––––
Current liabilities
Payables 385·2
––––––––
Total equity and liabilities 9,136·3
––––––––
The tariff for using the ferry for a one-way trip across the Matara estuary is as follows:
Mode of transport $
Foot passengers and pedal cyclists 1·00
Motorcycles 1·50
Motor cars and vans 2·00
Lorries and buses 5·00
This tariff structure has just been introduced and will be in place for a three-year period. It is expected that prices will
rise by 20% at the end of this period.
The third ferry
The towns of Garnet and Amesite are predicted to grow significantly in size over the next decade. Much of this
predicted growth stems from the international reputation of Garnet University for its research into robotics and software
engineering. In recent years, this research expertise has spawned two large science parks and has attracted a host of
hi-tech businesses to the town and to the surrounding areas. According to Garnet Chamber of Commerce, the growth
in the number of businesses locating, or re-locating, in the Garnet area is set to continue over the next five years and
this will lead to a significant increase in population for both Garnet and Amesite.
The directors of Bismuth Co were quick to recognise that predicted population changes will have a significant impact
on traffic movements between Garnet and Amesite. Some months ago, they lodged an application with Garnet and
Amesite town councils for permission to build a toll bridge that will link the two towns. The application was lodged
on the basis of a joint venture between Bismuth Co and Sinter Co, a large local contractor. This application has just
been granted and has been greeted with enthusiasm among the inhabitants of both towns. It is expected, however,
that the bridge will not be in operation for another five years, as there are various difficult engineering problems to
overcome. When the bridge is finally completed, the ferry service will no longer be required.
The ferry service has already seen a significant increase in traffic in recent years. As a result, the existing two ferries
can no longer cope effectively. Queues at peak times are very long and revenue is being lost as many vehicles now
avoid the queues by using a toll bridge located three miles further up the river. The management of Matara Ferry Co
has submitted requests to the board of directors of Bismuth Co that a third ferry should be introduced to deal with the
problem. This would enable a service to be provided every 10 minutes at peak times and would eliminate the long
queues. It would also staunch the flow of lost revenue, which is likely to increase significantly over the next five years.

21 [P.T.O.
A joint investigation by the Matara Ferry Co, Garnet Town Council and Amesite Town Council has shown that predicted
ferry traffic numbers over the next five years, assuming an effective service can be offered, are as follows:
Year to 31 July
2011 2012 2013 2014 2015
000 000 000 000 000
Mode of transport
Foot passengers and pedal cyclists 64·8 79·6 97·8 115·2 123·4
Motorcycles 165·4 195·8 216·7 244·5 276·2
Motor cars and vans 880·6 940·4 1,085·8 1,232·5 1,421·6
Lorries and buses 240·3 304·7 324·8 284·5* 314·9
*A fall in the number of lorries and buses in 2014 is predicted as a major road haulage business has plans to move
its base to another area. There is an increase, however, in the underlying trend.
The joint investigation also found that, if only two ferries are used to provide a service, the loss in passenger numbers
from those predicted above are likely to be as follows:
Year to 31 July
2011 2012 2013 2014 2015
% % % % %
loss loss loss loss loss
Mode of transport
Foot passengers and pedal cyclists Nil Nil Nil Nil Nil
Motorcycles 5 7 10 12 15
Motor cars and vans 10 14 18 20 21
Lorries and buses 3 5 8 11 14
The joint investigation concluded that it would be feasible to accommodate another ferry provided a new slipway was
built and other capital expenditure was incurred. The estimated capital costs are as follows:
Capital expenditure $000
Slipway 1,400·0
Pontoon ferry 7,500·0
Causeway and marshalling area 2,700·0
Storage facilities, gantries and other infrastructure 600·0
The cost of the ferry and related infrastructure would be eligible for a central government grant. It is estimated that
40% of the total cost could be recouped from central government. The grant will be payable in two equal stages. The
first stage payment would be payable within six months of the new ferry being ordered and the second stage payment
would be made one year after the first payment.
The purchase of the ferry and the infrastructure developments would take time and it is estimated that it would take
a year before the new ferry was operational. When the ferry service ceases to operate, the residual value of the above
capital expenditure has been estimated at $6·5m.
The directors of Bismuth Co have resisted requests for a third ferry from the management of Matara Ferry Co. One
reason for this is that building a new toll bridge will incur large capital expenditure over the next five years. The
directors do not wish to add to this burden by upgrading the ferry service, which will be redundant in five years’ time.
Bismuth Co has incurred heavy operational losses in recent years and funding the new toll bridge is already likely to
pose problems for the company.
The town councils of Garnet and Amesite recognise the financing problems facing Bismuth Co but are under
increasing pressure from local inhabitants to deal with the peak-time traffic congestion. Representatives of the two
councils have held a series of meetings over this issue and have recently approached the board of Bismuth Co with
a view to acquiring the Matara Ferry Co. If acquired, the company would be jointly owned by the two councils and
would be administered by a joint committee. A new ferry would then be ordered immediately to ease the traffic
problems until the new bridge is built.

22
Accountants working for the two town councils have estimated that the cost of operating an additional ferry, excluding
depreciation, in the first year of service would be as follows:
Cash operating expenses for year to 31 July 2012
$000
Salaries 360·0
Maintenance 84·0
Operations 109·0
Administration 37·0
Miscellaneous 12·0
These expenses are expected to rise by 5% per year over the next three years.
In discussions with the board of directors of Bismuth Co, representatives of the two town councils have been informed
that total expenses, excluding depreciation, of Matara Ferry Co are also expected to rise by 5% per year over the next
five years. The Matara Ferry Co charges depreciation at the rate of 8% per year on the cost of non-current assets held
at the year end. The company’s investment in working capital is predicted to remain the same over the next five years,
even if a third ferry is added.
Accountants working for the two town councils are confident of the accuracy of all the predictions mentioned above.
However, the residual value of the property plant and equipment held by Matara Ferry Co is difficult to establish. Many
of the existing non-current assets will be quite old when the new bridge is finally built and the ferry service ceases.
Estimates of their residual value vary from between $1·2m and $3·5m. No new capital expenditure is planned by the
company over the next five years.
The relevant cost of capital for the acquisition is estimated to be 9%.
The new bridge
As mentioned above, the successful application to build the bridge is based on a joint venture arrangement with Sinter
and Co, a large local contractor. The financing of the project has been agreed as 80% Bismuth Co and 20% Sinter
Co. The bridge building will be largely undertaken by Sinter and Co but sub-contractors will be employed for certain
specialist operations.
The bridge will be of a cantilever type and consist of steel girders and concrete decking. The superstructure will be
supported on six piers in the watercourse and two abutments constructed on the bridge approaches. The bridge
construction stages and associated costs have been estimated as follows:
Stage Year to 31 July Cost
$m
1. Excavation and preparing bridge foundations 2011 and 2012 55·0
2. Construction of piers, abutments and earthworks 2013 and 2014 75·0
3. Installation of superstructure and completion of earthworks 2015 82·0
––––––
Total cost 212·0
––––––
The directors of Bismuth Co believe that building a new toll bridge will help to transform the fortunes of the company.
The recent financial history of the company has been poor as various parts of its operations have underperformed.
Company profits for the period 2005–2009, which exclude the results of the Matara Ferry Co subsidiary, are shown
below.
Year to 31 July
2005 2006 2007 2008 2009
$m $m $m $m $m
Operating profit/(loss) 110·5 57·6 (92·8) (1·7) (24·4)
Profit/(loss) for the year 48·5 (5·6) (142·8) (53·7) (76·4)

23 [P.T.O.
The draft financial statements of Bismuth Co for the most recent year are set out below. (These draft statements
exclude the financial results of the Matara Ferry Co subsidiary.)
Income statement for the year ended 31 July 2010
$m
Revenue 850·5
Cost of sales (510·3)
––––––
340·2
Operating expenses (370·4)
––––––
Operating loss (30·2)
Interest (52·0)
––––––
Profit/(loss) before taxation (82·2)
Tax –
––––––
Profit/(loss) for the year (82·2)
––––––
Statement of financial position as at 31 July 2010
$m
ASSETS
Non-current assets
Property, plant and equipment at cost 1,450·0
Depreciation (601·7)
–––––––
848·3
–––––––
Current assets
Inventories 481·3
Receivables 510·6
Cash 61·2
–––––––
1,053·1
–––––––
Total assets 1,901·4
–––––––
EQUITY AND LIABILITIES
Equity
Ordinary $1 shares 300·0
Retained earnings 490·9
–––––––
790·9
–––––––
Non-current liabilities
8% Loan notes (Secured) 650·0
–––––––
Current liabilities
Payables 433·0
Short-term borrowings 27·5
–––––––
460·5
–––––––
Equity and liabilities 1,901·4
–––––––

24
Despite the recent problems, the directors believe that the company has a brighter future. Future revenues for the next
five years are forecast to be as follows:
Revenue forecast for the year ended 31 July
Year $m
2011 904·4
2012 1,050·5
2013 1,080·3
2014 1,220·8
2015 1,310·4
To achieve the revenue forecast, it is estimated that the following additional investment would be required:
Additional investment requirements
Additional Additional
non-current assets working capital
Year ended 31 July $m $m
2011 24·5 36·0
2012 32·8 102·4
2013 48·5 20·8
2014 10·8 85·8
2015 34·6 60·6
In addition, the following estimates and assumptions have been made:
1. The accumulated tax losses of the company will mean that no tax on profits will be payable over the next five
years.
2. The current gross profit margin will be maintained for the foreseeable future.
3. The current level of operating expenses, excluding depreciation, will rise by 4% each year over the next five years.
4. The average depreciation charge for existing property, plant and equipment is 8% per year on cost.
5. The average depreciation charge on new non-current assets will be 10% per year on cost. No depreciation is
charged on assets under construction.
The directors of the company are considering either a rights issue of ordinary shares or a loan to deal with any
financing requirements over the next five years.

25 [P.T.O.
Required:
For Garnet and Amesite town councils:
(a) (i) Calculate the maximum price per share that should be paid to acquire the Matara Ferry Co;
(ii) Comment on the results of your calculations and suggest a range within which share price negotiations
should take place. (20 marks)

(b) (i) Assess the financial viability of acquiring a third ferry;

(ii) Comment on the results of this assessment and state whether the investment should be made.
(16 marks)

(c) Assuming a bid for Matara Ferry Co is accepted, identify and discuss the information to be gathered when
carrying out a due diligence investigation. (16 marks)

For Bismuth Co:

(d) (i) Calculate the annual financing requirements for each of next five years, assuming that the maximum
share price for Matara Ferry Co calculated in (a)(i) above is offered and accepted, and comment on the
results;
(ii) Evaluate fully the two financing options currently being considered, using relevant calculations to
support your arguments. (28 marks)

(e) Identify the potential benefits, risks and problems of entering into a joint venture with Sinter Co and discuss
how the risks and problems identified may be managed. (20 marks)

(100 marks)

Notes:
1. Assume that it is now 1 August 2010.
2. Clearly state any key assumptions made.
3. Show all significant workings.
4. Calculations for Parts (a) and (b) should be in $000s and to one decimal place.
5. Calculations for Part (d) should be in $ms and to one decimal place.

End of Question Paper

26