Welcome to your CMA Case Study - Mock Paper 01

Unseen 1A. Acquisition of a company outside the western province

The company has been eying for an apartment building project outside the western province that will enable it to go beyond the western province in which they have previously operated. Since its operation is mainly limited to the Colombo and outskirts, the project requires it to acquire or partner with another company which is established and are capable of handling such large value construction projects.

There is a possibility for the company to acquire another construction company in the province in which the apartment project is coming up. This company (LCL) being a private company is in the business of construction for 30 years. It has its network of raw material suppliers and labour contractors who can provide outsourced labour on demand. Although the company is well established and has a reputation as a reliable company it has had several complaints of late from the customers of completed projects for project delays. There are rumours in the industry that some of its clients have charged penalties and retained retention monies to compensate for the project delays. There are several litigations filed by the company and also against the company for several disputes regarding the collection of the dues and project completion delays. However, the technical staff in the company are well reputed and possess years of construction experience. They all have mechanical backgrounds. The company only has 1 quantity surveyor.

Following summary financial details are given for the new company

Year

1

2

3

EBITDA (Rs. million)

10

12.5

15.6

Net Cap Ex (Rs. million)

3

4

     5

Total Working Capital (Rs. million)

60

70

82

Interest charges (Rs. million)

4

4.5

5

Debt to Capital Ratio

25%

25%

25%

FCL’s cost of equity and pre-tax cost of debt are 12% and 8%, respectively. The firm will grow at 5% forever, starting in year 4. The working capital currently is Rs 52 million

The company’s net assets are Rs. 52mn. Included in the net assets  are receivables for more than 365 days invoiced at Rs. 10mn and inventory of Rs. 5mn remaining from a previous construction project as excess materials since 2018. The company is intending to finance the new investment through a new loan facility

B. Restructuring of the finance department

Along with the announcement of the Accountant of her intention to resign from the company to pursue her studies, the directors have decided to recruit a fully qualified, experienced accountant even from a different background to bring a different perspective to the business and to play a key strategic role in the company along with the directors. The recruit would be placed at a strategic role to advice the directors and to formulate the overall finance policy and to structure the finance department to streamline the preparation of financial statements, finalizing of audits on time, better management of the working capital and to provide key financial insights to directors on a timely basis using project management software and data boards.

C . Consulting concerns

The financial results of FCL were subject to a detailed review by the founder Directors together with the Management Consultant who’s hired for a temporary basis. of the company. The consultant who has a finance background has analyzed the company’s existing audited financials and the draft financials has cautioned the company about its high gearing and working capital management concerns.

End

Assume you are the management consultant appointed by FCL temporarily.  You have been given a task of formulating and recommending necessary organizational and strategic changes to improve the future of FCL.

You are required to:

To address the Directors of FCL in the form of a report, focusing on the specific areas mentioned under each of the following headings from a to f. (An ‘executive summary’ is not required)

a ) .Recommend suitable working capital management strategies to improve the working capital of FCL (25 marks)

i. Calculate suitable ratios to highlight the working capital, liquidity and gearing concerns


 

ii. Explain how the company can improve its working capital management through operational changes
b ). Recommend whether or not the company should acquire LCL (25 marks)
i. Calculate the range of prices FCL should offer to LCL
ii. List Non financial factors FCL should consider before acquiring LCL
iii. Explain how LCL can react to a possible acquisition offer from FCL
c ). Recommend how FCL can restructure the finance department and key factors they should consider addressing the financial concerns raised by the directors. As a consultant, address the specific areas the company needs to focus to improve the finance function. (10 marks)
d ). Show the SWOT Analysis of FCL based on the factors outlined in the preseen and unseen. You may list the factors under each heading. You need to justify your assumptions about the inclusions. (10 marks)
e ). Identify the impact of the current environmental trend by showing the impact of each of the factors from a strategic perspective. (10 marks)
f ). In order for FCL to maintain its intended pricing strategy, calculate the variation in the revenue by doing suitable adjustments to the existing Income statement. Mention your assumptions clearly (20 marks)