BUSINESS

VALUE,
GOVERNANCE
AND RISK
PROFESSIONAL PROGRAMME
EXAMINER’S GUIDE:
JUNE 2018 EXAMINATION
PP
The contents of this examiner’s guide are intended
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Contents Page
Introduction 3

Section 1
Module Objective 5

Section 2
Marks Allocation and Examination Format 5

Section 3
Examiner’s Report 6

Section 4 9
Examination Questions

Section 5
Suggested Solutions for Individual Questions 24

Section 6
Common Examination Verbs 52

© 2018 Singapore Accountancy Commission Page 2 of 58

INTRODUCTION

Disclaimer
The examination questions and suggested solutions in this publication have not been
updated for any changes in legislation, standards or syllabus. They must be used with
caution when preparing for any examinations.
Please also note that the solutions listed in this document are “suggested” solutions
only. Candidates who provide alternative, valid answers not covered in this document
will be awarded the appropriate credit.
For educational purposes, the suggested solutions are intended to be more
comprehensive and detailed than would be expected from a Candidate taking the
examination.

The Examiner’s Guide

The SAC has introduced the Examiner’s Guide to help Candidates to be better
prepared for the Singapore CA Qualification examinations. The Examiner’s Guide
provides the examiner’s report and suggested answers to the June 2018
Examinations.

Candidates are advised to approach the Registered Learning Organisations (RLOs)

for tuition support and should they have any queries.

About the Singapore Accountancy Commission (SAC)

The Singapore Accountancy Commission spearheads the development of the
Singapore accountancy sector with the vision of developing Singapore into a leading
global accountancy hub. The SAC is working to achieve this by deepening the skills
of the accountancy talent pool; developing the industry to capture growth
opportunities; and creating a hub and exchange by building Singapore into a centre
for thought leadership. The SAC is a statutory body under the Ministry of Finance.

For more information, please visit [Link]

About the Institute of Singapore Chartered Accountants (ISCA)

The Institute of Singapore Chartered Accountants (ISCA) is the national accountancy
body of Singapore. ISCA’s vision is to be a globally recognised professional
accountancy body, bringing value to our members, the profession and wider
community. There are over 32,000 ISCA members making their stride in businesses
across industries in Singapore and around the world.

Established in 1963, ISCA is an advocate of the interests of the profession.

Possessing a Global Mindset, with Asian Insights, ISCA leverages its regional
expertise, knowledge, and networks with diverse stakeholders to contribute towards
Singapore’s transformation into a global accountancy hub.

ISCA is the Administrator of the Singapore CA Qualification and the Designated Entity
to confer the Chartered Accountant of Singapore - CA (Singapore) - designation.

© 2018 Singapore Accountancy Commission Page 3 of 58

ISCA is a member of Chartered Accountants Worldwide (CAW). CAW brings together
12 chartered accountancy bodies connecting and representing the interests of over
1.7 million members and students globally.

For more information, visit [Link].

© 2018 Singapore Accountancy Commission Page 4 of 58

 Section 1
Module Objective

Upon completion of the Business Value, Governance & Risk module, Candidates
will be able to demonstrate a sound understanding of the basis upon which
corporate value is created, maintained sustainably (e.g. sound investment
decisions) and protected (e.g. by avoidance of excessive concentration of power
and lack of scrutiny of management). Candidates will be able to assess how
governance arrangements may prevent long-term dysfunctional behaviour. The
module addresses risk management as a key factor in governance and strategy. It
develops skills from previous studies in asset valuation in the context of wider
considerations of capital investment appraisal, including strategic investment
decisions, taking into account underlying financial risk management concepts for
effective and responsible decision making.
Section 2
Marks Allocation and Examination Format

Question 1 – (a), (b), and (c) 20 marks

Question 2 – (a) only 30 marks
Question 3 – (a), and (b) 20 marks
Question 4 – (a), (b), (c) and (d) 30 marks

This module is assessed by way of a 3-hour 15 minutes open-book, essay and case-
study based examination, and requires the use of a personal laptop. There are four
questions, and each question may have multiple parts requiring structured
responses. For instance, short answer questions, essay style questions,
computations, or standard format questions

In order to achieve a pass in this module, a Candidate must achieve at least 50% of
the available marks in the final examination.

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Section 3
Examiner’s Report

i. General comments

This examination consisted of a single case study with financial and industry data
contained in appendices. Considering the nature of the topics examined in this
module, the question paper was divided into two sections of equal weight. The case
study company was a home-grown manufacturer of solar panels with a single
manufacturing plant in China. The company plans to list on the Singapore Exchange
(SGX) to fund its future expansion.

Governance & Risk component – Questions 1 and 2 (50 marks)

In Question 1, Candidates were tested on their understanding of the qualifying criteria

for a Chief Financial Officer, the challenges facing a newly appointed Board Chairman
and the priorities of an Audit Committee in a newly listed company. Question 2
focused on risk management where Candidates were required to identify key risks
facing the Company, the relevant key risk indicators (KRIs) to monitor the respective
risks, as well as relevant control procedures to manage these risks.

Overall, Candidates fared better in Question 2 but many Candidates failed to identify
KRIs and control procedures that are relevant to the key risks. Marks were lost
because of this. In Question 1, many Candidates failed to answer Question 1(b) and
1(c) which will be further elaborated below. Candidates should also be mindful that
their answers should be specific to the case study and not taken from textbooks and
references or generic in nature.

Business Value Component – Question 3 and 4 (50 marks)

Question 3 tested Candidates on identifying reasons for locating the enterprise in

Singapore, and performing partial valuation of a pre-IPO convertible bond issued to a
private equity firm. The question was poorly answered by most of the Candidates.

Question 4 asked for valuation of the solar panels manufacturer using an Adjusted
Present Value model. This question was poorly answered as Candidates did not
display adequate understanding on capital expenditure and bond or debt vs equity.
Candidates tend to spend too much time on Question 4 (a) and a large number of
Candidates left Question 4 (c) and 4 (d) unanswered as Candidates appeared to have
run out of time.

Overall, Candidates performed better for the Governance & Risk Component than they
did for Business Valuation.

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 ii. Analysis of individual questions

Question 1

Overall, the answers to this question were weak with many Candidates providing very
brief answers. It was noted that there was poor justifications or analysis made with
regard to each of the main points made in respect of Question 1(b) & 1(c).

Part (a) was well attempted by most Candidates, with most of the Candidates being
able to identify the reasons why Sally was not ready to take on role of the CFO. Most
Candidates were able to cite the lack of accounting knowledge and risk management
experience as the main reasons. However, some Candidates did not link the reasons
with justifications in the case study which resulted in loss of marks.

Part (b) required Candidates to identify the challenges facing a newly appointed Board
Chairman and how he can overcome them. Candidates did moderately well for part
(b) (i). Most were only able to identify the lack of industry or business experience on
the part of John as the incoming Board Chairman. As John holds a full-time job, some
Candidates cited the lack of commitment and time but this matter is not conclusive
from the case study. Part (b) (ii) was poorly attempted, partly due to a lack of
understanding of the question and not answering to the context. Instead of focusing
on the key areas on how John can be an effective Board Chairman, many Candidates
gave generic recommendations such as taking up courses or attending training to
improve accounting and industry knowledge. The question could be better attempted
if Candidates can provide more in depth analysis with regard to the selection of board
members, managing board agenda and setting matters that are to be reserved for the
board decision, etc.

Part (c) was poorly answered, with many Candidates failing to reach passing marks.
Most Candidates gave recommendations such as conducting stock counts and
addressing the labour turnover in China, the latter primarily an executive function. The
question could be better answered if Candidates put themselves in the role of a
member of the Audit Committee and answer to the context.
Question 2

Many Candidates did not read the question carefully. This question requires
Candidates to identify key risk events in part (a) (i). Using these risk events, part 2
(a) (ii) and part 2 (a) (iii) require Candidates to identify the relevant key risk indicators
(KRIs) and internal control procedures, respectively. Many Candidates lost marks
because their answers to part 2(a) (ii) and part 2(a) (iii) were not related to part 2(a)
(i).

In part (a) (i), many Candidates seemed to not understand what a risk event is and
instead offered internal control lapses in the day-to-day operational procedures such
as input errors and transcription errors.

For part (a) (ii), a fairly large number of Candidates were unable to identify KRIs.
Some provided indicators which are non-measurable and therefore do not qualify as
Key Risk Indicators while others did not answer this part of Question 2.

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 Part 2(a) (iii) tested Candidates on their ability to identify relevant internal control
procedures to address the risks identified in part (a) (i). Most Candidates were able
to cite internal control procedures but not all were relevant to the risks that they had
identified earlier in part (a) (i).
Question 3

Part (a) required analysis of the effect of being located in Singapore on the company
value. Part (b) required valuation of the straight portion of a convertible bond issued
pre-IPO to a private equity firm.

Part (a) was not adequately answered. Some Candidates could suggest reasonable
advantages of the Singapore location, such as taxes, government incentives as
advantages. However, very few Candidates were able to identify and higher
administrative costs as a disadvantage.

Part (b) was poorly answered. The question required computing the issuer’s cost of
debt using a synthetic credit rating based on two ratios—Return On Asset (ROA) and
interest cover. Many Candidates could compute only ROA correctly. The question
also required interpolating between the given points on risk-free rate curve. However,
most Candidates were unable to perform the interpolation of the risk free rates and
apply the spread correctly based on their synthetic credit rating.
Question 4

Question 4 required valuing the company using an adjusted present value approach.

Question 4 was poorly answered. Most Candidates could not complete the question
possibly due to poor time management.

Part (a) required computing the free cash flow to the firm. Most Candidates could
correctly compute the main operating revenue and expense items and apply the
correct exchange rates where needed to express them in Singapore dollars. Many
Candidates failed to properly reflect the capital allowances in computing the free cash
flow to the firm. A number of Candidates misinterpreted the projected level of working
capital to be the change in working capital. Most Candidates did not consider how to
reflect capital expenditure in the last year of projections, which forms the basis for the
terminal value.

Part (b) required computing the unlevered cost of equity for each year using the capital
asset pricing model (CAPM). Most Candidates correctly reflected the mean or median
guideline company unlevered beta. Most Candidates failed to reflect the risk-free rate
as an annually compounded rate before including it in the CAPM equation.

Part (c) required computing the adjusted present value and using it to value a share.
Most Candidates could not complete this part. For those who did, the application of
the model was reasonably correct.

Part (d) required comparing the estimated share price to the conversion price of the
convertible bond. Most Candidates either could not complete this part or provided
inadequate answers, probably due to poor time management.

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Section 4
Examination Questions

Singapore CA Qualification Examination

19 June 2018

Business Value, Governance & Risk

INSTRUCTIONS TO CANDIDATES:
1. The time allowed for this examination paper is 3 hours 15 minutes.
2. This examination paper has FOUR (4) questions and comprises FIFTEEN (15)
pages (including this instruction sheet). Each question may have MULTIPLE
parts and ALL questions are examinable.
3. This is an open book examination. During the examination, you are allowed to
use your laptop and any calculators that comply with the SAC’s regulations.
Please note that mobile phones, tablets, and all other electronic devices MUST
NOT be used during the examination.

4. This examination paper is the property of the Singapore Accountancy

Commission.

MODULE-SPECIFIC INSTRUCTIONS:

5. This case is hypothetical and has been written exclusively for the purpose of this
examination. Names, characters, places and incidents used are imaginary or
fictional. Any resemblance to actual events or locales or persons, living or dead,
is entirely coincidental. This case is not to be cited without the permission of the
Singapore Accountancy Commission.

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Company Background

Solar Pals Pte Ltd (SP) is a Singapore-incorporated solar panels manufacturer,

founded by three friends in 20x0 (about eight years ago). All solar panels are
manufactured in SP’s only factory in Shenzhen in China. SP has a total headcount of
100 employees, of which 80 are manufacturing-related with most being hourly-rated
workers. Turnover is high and replacement has been slow, leading to often high
overtime hours. High turnover has also adversely impacted product quality and
delayed the contracted delivery timeline of finished goods. The Board is also aware
of China’s stringent labour laws concerning overtime hours and workplace safety.

The current Board of Directors comprises the three founders who are Executive
Directors (EDs), namely:

Name Title Area of responsibility

Executive Chairman &
Alex Ong Chief Executive Officer
(CEO)
Chief Operating Officer
Hamid Ismail All manufacturing activities
(COO)
All corporate functions such as finance,
Chief Administrative human resources, marketing, sales,
Jennifer Hanson
Officer (CAO) customer relationship management,
etc.
Related parties: Jennifer and Alex married in December 20x3

Both Alex and Hamid are engineers while Jennifer is a chartered accountant. Alex
decides the agenda for each Board meeting and it focuses on business matters such
as new business strategies and plans, customer and supplier relationships, and
potential new markets. Alex feels that governance and risk matters are not relevant
Board matters. Although each ED is responsible for the day-to-day oversight of the
business and operations in their respective areas, Alex makes all key business
decisions.

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Most staff in the corporate functions have been with SP since its incorporation. Hence
there is little formal documentation by way of policies and procedures as staff rely on
their knowledge gained through on-the-job experience.

Accounting and Audit

The Finance Department (FD) is a two-person team. The Accountant, Sally, joined
SP in December 20x0 fresh out of polytechnic with a diploma in business studies. The
accounting activities are primarily outsourced to a small accounting firm, PNL
Associates (PNL). Daily and monthly accounting entries are keyed into an accounting
system owned by PNL by the FD staff. Monthly management accounting reports and
year-end financial statements are reviewed by Jennifer who discusses SPs’ financial
performance with Alex and Hamid directly.

SP has generally been satisfied with PNL’s service level except for occasional delays
in receiving monthly management reports and slow year-end book closure due to
PNL’s resource constraints and challenges faced by SP’s FD in identifying all
accounting entries needed for financial year-end book closure.

SP’s external auditor is BPM, a small two-partner accounting firm. In the last two
years, BPM had made audit adjustments arising from cost accounting errors in work-
in-progress and finished inventories. For instance, raw materials comprise a
substantial proportion of SP’s annual operating expenditure. In the past, BPM has
commented on the lack of a regular inventory count and measures over the transfer
of raw materials from the factory store to the production line. Jennifer attributes this
to growing business complexity and a lack of understanding on the part of PNL’s staff.

The procurement process is largely manual and handled by the FD as there is no

separate purchasing department. The key procurement procedures in the Procure-to-
Pay process are as follows:

 Requisitions for raw materials are emailed to the FD by the inventory manager
based in China.

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 The FD prepares the purchase orders which are approved by Hamid who also
selects the supplier.

 Raw materials are purchased primarily from four suppliers who, over the years,
have enjoyed a close business relationship with the Board in particular, Hamid.

 Raw materials are delivered directly to the factory in China. The inventory
manager checks and acknowledges receipt, then emails a copy of the Goods
Received docket to the FD. The inventory manager is also responsible for
approving the transfer of raw materials to the production line.

 The FD processes the payments upon receipt of the supplier invoices which are
matched to the Goods Received docket.

 Production reports, including raw materials utilisation and wastage/scrap reports,

are prepared by a production staff member in China and submitted directly to
Jennifer for review.

Proposed Listing on SGX (Initial Public Offering – IPO)

SP plans to list in Singapore on the Catalist of the Singapore Exchange (SGX) around
November 20x9.

Board Composition
Alex recently invited John Suresh to assume the position of Independent Non-
Executive Chairman of the proposed listed company, which John has accepted. John
has no prior commercial dealings with SP nor its Board and management.

John is a young practising Singapore-based lawyer and his other principal

commitment is that of an Audit Committee (AC) member of an SGX-listed engineering
services company with interests in Malaysia. John was appointed to this AC one year
ago and this was his first and currently only appointment to a listed entity.

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Another two Independent Directors (IDs) will be appointed and, together with John,
they will form the Audit & Risk Committee (ARC). John has been invited to interview
the proposed ID-candidates together with Alex.

Convertible Bond
On 1 November 20x7, SP issued a convertible bond for S$9.6 million to a Singapore
private equity firm, Sing PE. The terms are as follows:

Issue date 1 November 20x7

Maturity date 1 November 20y0 (3 years)
Principal S$9.6 million
Annual coupon S$440,000
Half-yearly coupons paid on 1 May and 1
Coupon payment dates
November
Amount due on maturity (if not
S$10 million
converted)
Number of shares on conversion 9.6 million
Any date after the IPO is successfully
Conversion date completed (if that happens) until maturity.
Conversion is at the holder’s option.

In accordance with Singapore Financial Reporting Standards (International), SP has

recorded the bond as a straight-bond portion (a liability) and a conversion option (part
of equity).

The convertible bond represents the only debt. SP does not have plans for further
future borrowing.

Additional information as of 1 November 20x7

1. Projected annual selling and administrative expenses at the Singapore
Headquarters amount to S$2,500,000 and these projections are expected to stay
constant for the future.

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2. SP has contracts with customers in Germany to sell solar panels from 1 January
20x7 to 31 December 20x8. SP expects to renew the contracts with the German
customers after they expire. The projected five years of sales revenue in Euro
(€) is as follows:

20x7 20x8 20x9 20y0 20y1

€ ‘000 € ‘000 € ‘000 € ‘000 € ‘000
13,250 13,250 10,300 10,609 10,927

3. The projected total manufacturing costs over the next five years in RMB is as
follows:

20x7 20x8 20x9 20y0 20y1

RMB ‘000 RMB ‘000 RMB ‘000 RMB ‘000 RMB ‘000
19,772 19,772 20,101 20,440 20,789

4. SP projects that capital expenditure would be RMB16.25 million every five years.
It estimates that this amount would be constant, as inflation would be offset by
cost reductions due to new technology. The next capital expenditure outlay
would be in 20y0. SP can claim a 100% capital allowance on its capital
expenditure.

5. SP projects working capital requirements in 20x8 and beyond to be 3% of sales

revenues. No increase in working capital is expected for 20x7 and 20x8.

6. Assume that cash flows occur evenly throughout the year.

7. SP would have 100 million shares outstanding after accounting for potential
dilution from the convertible bond.

8. The equity market premium is 8%.

9. The long-run projected growth rate of the industry is 0.1%.

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10. SP estimates that given its risky industry, it faces a long-run probability of
bankruptcy of 10%. In the event of bankruptcy, estimated bankruptcy losses
would equal 20% of the estimated enterprise value before considering
bankruptcy.

11. SP faces a corporate income tax rate of 17%.

12. The balance-sheet date is 31 December.

13. The reporting currency is the Singapore dollar (S$).

14. The year 20y0 is a leap year.

The following appendices form an integral part of the case study.

Appendix 1 lists risk-free spot rates in Germany in euro (€), China in renminbi (RMB),
and Singapore in dollars (S$) as of 1 November 20x7.

Appendix 2 provides selected forward exchange rates computed using covered

interest rate parity (CIRP).

Appendix 3 provides information from Mody and Fotch, a credit ratings agency, on
key parameters for issuers of various classes under their classification.

Appendix 4 provides some projected ratios for SP.

Appendix 5 provides asset betas for guideline companies.

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APPENDIX 1 - Estimated yields to maturity for government zero-coupon debt
These represent the estimated yield to maturity (in the respective country’s domestic
currency) as of 1 November 20x7 of a hypothetical zero-coupon bond issued by the
respective governments to pay 1 currency unit (of its domestic currency) at the
specified maturity date (given in YYYY MM DD format). The quoted rate is based on
semi-annual compounding, i.e., for rate r,

1
𝑑𝑡 =
𝑟 𝑡×2
(1 + 2)

where 𝑑𝑡 is the present value of 1 currency unit received at maturity t, and t is the time
to maturity in years. The rate is quoted as a percentage.

Maturity Germany Singapore China

20x7 11 15 (0.80) 1.60 3.50
20x8 01 01 (0.80) 1.60 3.50
20x8 07 01 (0.80) 1.80 3.50
20x9 01 01 (0.80) 1.80 3.50
20x9 07 01 (0.70) 1.80 3.50
20y0 01 01 (0.70) 1.80 3.50
20y0 07 01 (0.60) 2.00 3.50
20y1 01 01 (0.60) 2.00 3.50
20y1 07 01 (0.60) 2.00 3.70

The corresponding rate for all maturities later than 20y1 07 01 may be assumed as
1% in Germany, 2.1% in Singapore, and 4% in China.

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APPENDIX 2 - Forward exchange rates for selected maturities as of 1 November
20x7 (estimated using covered interest rate parity)

1 Dec 20x7 1 Jul 20x8 1 Jul 20x9 1 Jul 20y0 1 Jul 20y1
S$ per € 1.56312 1.58721 1.62619 1.67160 1.71547
S$ per RMB 0.19969 0.19778 0.19448 0.19226 0.18808

APPENDIX 3 - Mody and Fotch credit ratings agency

Average levels of standard parameters for issuers of different quality (report is based
on three-year average financial statement figures up to 20x5):

All rated bonds are denominated in Singapore dollars (S$)

High Low
Investment Investment Junk
Grade Grade
Operating ROA 10% 5% Negative
EBIT interest cover 3x 1.2x 0.8x
Spread above the spot risk-free
interest rate curve in basis points
130 520 1,100
(based on semi-annually compounded
spot risk-free interest rates)

Legend
EBIT = Earnings before Interest and Tax
ROA = Return on Assets

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APPENDIX 4 - Ratios for Solar Pals Pte Ltd (based on three-year average figures
up to 20x5)

Net profit margin 5%

Net operating profit after tax (NOPAT) / sales 13%
Effective tax rate (ETR) 17%
Asset turnover 0.4

APPENDIX 5 - Asset betas for listed companies similar to Solar Pals Pte Ltd

Company ID Asset beta

1 0.80
2 0.85
3 0.51
4 0.68
5 0.73

© 2018 Singapore Accountancy Commission Page 18 of 58

Examplify Question 1 required:
Question
Number The Board of Solar Pals Pte Ltd would like to promote the current
Accountant, Sally, to the position of Chief Financial Officer, with
responsibility over Finance and Enterprise Risk Management, in
recognition of her loyalty to the company. You have been asked to
evaluate her suitability for this role.

1 (a) Provide FOUR reasons with evidence from the case why Sally
may not be ready to assume the role of Chief Financial Officer.
(4 marks)

(b) John Suresh, the proposed Independent Non-Executive

Chairman of the company when it lists (Sola Pals Limited) has
approached you for advice on the following two matters:

2 (i) Advise John on THREE challenges that he may face as

the Board Chairman of Solar Pals Limited. Justify your
advice. (6 marks)

3 (ii) Given that John has no prior experience as an

Independent Non-Executive Chairman, recommend
THREE ways in which he can be an effective chair.
(6 marks)

4 (c) Considering Solar Pals Pte Ltd’s current operations and

processes, identify TWO areas specific to accounting,
financial, operational, and compliance matters that the new
Audit & Risk Committee (ARC) will need to re-assess and direct
changes where appropriate. (4 marks)
(Total: 20 marks)

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Examplify Question 2 required:
Question
Number (a) Given that the procure-to-pay (including inventory
management) process is key to the business, the Audit & Risk
Committee (ARC) will need to understand and appreciate the
relevant risks.

5 (i) Identify SIX risk events relevant to Solar Pals Pte Ltd’s
current procure-to-pay cycle (including inventory
management); (6 marks)

6 (ii) For each risk event identified in (i) above, propose and
justify ONE key risk indicator. (12 marks)

7 (iii) For each risk event identified in (i) above, propose ONE
risk response to mitigate the risk. (12 marks)
(Total: 30 marks)

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Examplify Question 3 required:
Question
Number Your computations should be based on the facts in the case. Show
all workings clearly.

8 (a) Give FOUR reasons why being located in Singapore adds

value to Solar Pals Pte Ltd and ONE reason why being located
in Singapore reduces value for Solar Pals Pte Ltd. (5 marks)

9 (b) Estimate the fair value of the straight-bond portion of the

convertible bond as of 1 November 20x7 in Singapore dollars.
Your workings should include an assessment of the credit
rating for the convertible bond, the relevant risk-free rates for
each coupon date, and the risk-adjusted rates or discount
factors for each coupon date. Present your answers to the
nearest dollar. (15 marks)
(Total: 20 marks)

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Examplify Question 4 required:
Question
Number Your computations should be based on the facts in the case. Show
all workings clearly.

10 (a) Estimate the Free Cash Flow to the Firm (FCFF) for Solar Pals
Pte Ltd for each of the years 20x7 through 20y1 measured in
thousands of Singapore dollars using a Discounted Cash Flow
(DCF) valuation of Solar Pals Pte Ltd with 20y1 as the terminal
year. Present your answers to the nearest thousand Singapore
dollars. (12 marks)

11 (b) Compute the unlevered cost of equity for each of the years
20x7 through 20y1 for Solar Pals Pte Ltd as of 1 November
20x7. Your calculations should reflect the varying risk-free rate
for different years rather than assuming a constant discount
rate. Your calculations should be useful for discounting Free
Cash Flow to the Firm (FCFF) under an Adjusted Present
Value (APV) model. Present your answers as a percentage
correct to three decimal places. (5 marks)

12 (c) Estimate the fair price per Solar Pals Pte Ltd share in
Singapore dollars as of 1 November 20x7 using an Adjusted
Present Value (APV) approach. For this sub-part only, you
may assume that the fair value of the entity’s debt is S$9.3
million as of 1 November 20x7. Present your answers correct
to three decimal places. (5 marks)

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Examplify
Question
Number
13 (d) Compare the estimated share price calculated in (c) above to
the conversion price of the convertible bond and comment on
the convertible bond deal from the viewpoint of Solar Pals Pte
Ltd. (8 marks)
(Total: 30 marks)

END OF PAPER

© 2018 Singapore Accountancy Commission Page 23 of 58

Section 5
Suggested Solutions for Individual Questions

Question 1
(a) Provide FOUR reasons with evidence from the case why Sally may not be ready
to assume the role of Chief Financial Officer. (4 marks)

Note to Candidates: A CFO is expected to work with the CEO and other
members of the management team to formulate strategic plans for SP in
accordance with the strategy approved by the Board. The CFO is responsible
for all finance-related matters, including corporate finance, financial planning,
accounting, budgetary controls, treasury, and tax. The CFO will also be
responsible for enterprise risk management, internal controls, and compliance
reporting.

(i) a. Current Role of Sally: limited role as a finance function as most of the
accounting matters (including production of reports) are outsourced. The
Finance Department is only a 2-person team, giving Sally very limited exposure
to managing a finance function and the challenges that will come with it,
including managing independently on a day-to-day basis and reporting directly
to the Board as CFO. As SP prepares for a listing, her experience will not meet
the demands and expectations of a CFO, such as in engaging with all
stakeholders as well as SGX.

b. Financial Management Leadership: This is a basic requirement for a CFO.

However, Jennifer is primarily responsible for reviewing these reports and
presenting to the Board. Sally’s current role is primarily data entry in nature.

© 2018 Singapore Accountancy Commission Page 24 of 58

Question 1(a) cont.
c. Lack of accounting knowledge: May be quite basic given that she has only
worked several years in SP after completing her business studies diploma.
She is not a professionally qualified accountant yet. Her understanding of
accounting standards, management, and financial accounting reporting matters
may be limited given her current exposure and lack of accounting training. Also,
the external service provider handles most accounting matters. The audit
adjustments made by the auditors during the past two years in an accounting
matter over a core business activity. The need for such adjustments reflects
poorly on her accounting knowledge.

d. Lack of risk management experience: The CFO is responsible for both

finance and enterprise risk management. The latter is not an area that Sally
is responsible for currently. In addition, the CFO will be the main lead in ERM
and will need to interact closely with the Board and management to obtain their
buy-in as well as to deal with any resistance that may arise. Sally may be too
junior to be able to assume this responsibility.

e. Lack of strategic business thinking: Sally is unlikely to have gained much

experience in this area given that most decisions are made by the EDs.
However, this is a crucial quality of a CFO needed to support the Board and
management in business growth.

© 2018 Singapore Accountancy Commission Page 25 of 58

Question 1
(b) John Suresh, the proposed Independent Non-Executive Chairman of the
company when it lists (Sola Pals Limited) has approached you for advice on the
following two matters:

(i) Advise John on THREE challenges that he may face as the Board Chairman of
Sola Pals Limited. Justify your advice. (6 marks)

The challenges may be short term and long term related.

a. Governance, risk and controls – SP has focused on growing its business since
incorporation and the current Board does not believe that governance and
risk are relevant Board matters. John will have to ensure that as Board
Chairman he helps the Board to accept/recognise that governance and risk
matters form an important item in the Board agenda, and that the Board sets
the right tone-at-the-top through introducing the appropriate governance and
risk frameworks. He may face resistance from the EDs as governance and
risk matters have never been on the Board agenda. In particular, he may face
resistance from Alex who is the current Chairman and the sole director
determining Board the agenda in the past.

b. Board effectiveness – Having no prior experience as a Board chairman of a

listed company, no previous working relationship with the three EDs, and
potentially also the two new Independent Directors, John needs to work closely
with both the EDs and IDs to develop a culture of teamwork and collaboration
among the Board members. He may face resistance from the EDs who may
view independent directors as “outsider” interfering into the way the Board
has operated in the past and on how Board agenda was decided. He needs to
ensure that the Board collectively adds value to the organisation, not only in
terms of business decision making but also in areas such as ethical decision
making, helping Board members to challenge effectively and constructively, etc.

© 2018 Singapore Accountancy Commission Page 26 of 58

Question 1(b)(i) cont.

c. Leading the Board – John has no prior business knowledge of the trade. As
mentioned, he has no prior experience as a Board Chairman. The EDs who have
many years in the business may be entrenched in their views and on business
practices in China, a country which John does not have strong business
knowledge in. They may challenge any changes he or the other independent
directors propose to business and operational practices. John may feel
inadequate in contributing to the discussion on business strategies. Hence
John should ensure that he has a strong say in selecting the IDs who are
able to complement his expertise and offer constructive challenges.

d. Relationship with shareholders – John has only one year of ID experience

and in only one listed company. Hence he is unlikely to have interacted with
shareholders at AGMs and EGMs. He will therefore have to work hard at
establishing and maintaining productive relationship with shareholders.
Shareholders will have different interests, varying between long term business
growth, short term profitability, compliance, and dividend pay-outs.

© 2018 Singapore Accountancy Commission Page 27 of 58

Question 1

(b) John Suresh, the proposed Independent Non-Executive Chairman of the

company when it lists (Sola Pals Limited) has approached you for advice on the
following two matters:

(ii) Given that John has no prior experience as an Independent Non-Executive

Chairman, recommend THREE ways in which he can be an effective chair.
(6 marks)

a. Selection of Independent Directors – John has been given the opportunity to

interview the ID-candidates with Alex. He should ensure that he accepts Alex’s
offer to join him in the interview. In addition, John should also suggest other
suitable ID-candidates that he can offer for Alex’s consideration. John should
develop a set of ‘selection criteria’ for the types of IDs that he wishes to have on
the Board, such as IDs who are professional in the business relationship,
reputable, understand SP’s business, familiar with manufacturing in China, and
able to challenge constructively. The ID candidates should have skills and
business knowledge that can complement his.

b. Board agenda – currently Alex as Chairman and CEO determines the Board
agenda which is very focused on growing the business. As the new Chairman,
John should decide on the Board agenda and ensure that the agenda includes
regular discussion of key business, operations, governance, and risk
matters. In addition, John should also decide which management staff should
be invited to the Board meetings so that important matters may be discussed
directly with these staff.

© 2018 Singapore Accountancy Commission Page 28 of 58

Question 1(b)(ii) cont.

c. Matters Reserved for Board – At the moment, all key decisions are made by
the EDs, particularly Alex. Hamid also has significant decision-making over the
operations in China and the procurement approval process. John should ensure
that the recommendation in Principle 1.5 of the Code of Corporate
Governance is implemented. This Principle recommends that guidelines setting
forth the matters reserved for the Board’s decision should be developed by
the Board; and clear direction to management on matters that should be
approved by the Board. This document will help ensure that important matters
are not decided by the EDs alone. Principle 3 - There should be a clear division
of responsibilities between the leadership of the Board and the executives
responsible for managing the company's business. No one individual should
represent a considerable concentration of power.

d. Board composition – as Chairman, John should influence the Board

composition. He should be appointed a member of the Nomination Committee
so that he is involved in the selection of any new independent directors from the
beginning. As Chairman, he is responsible for ensuring that there is a
strong and independent element on the Board.

e. Board culture – as Chairman, John should lay down some ground rules on
Board deliberations including disagreement among members during Board
discussions. He should ensure there is sufficient time allocated for discussion
on governance, risk, and compliance matters. There should be rules regarding
civil and constructive debate to ensure all directors are heard. Ultimately a
harmonious Board is one which is likely to be successful and effective.

© 2018 Singapore Accountancy Commission Page 29 of 58

Question 1

(c) Considering Solar Pals Pte Ltd’s current operations and processes, identify TWO
areas specific to accounting, financial, operational, and compliance matters that
the new Audit & Risk Committee will need to re-assess and direct changes where
appropriate. (4 marks)

a. Outsourced Service Provider: the service provider is currently responsible for

almost all accounting matters in SP, including financial reporting. Need to re-
assess the need to establish an in-house Finance Department to ensure that
all financial controls come under the direct purview of the CFO. With the added
responsibility for ERM, there is stronger reason for establishing an in-house
Finance & Risk Department.

b. Accounting system: related to the outsourcing arrangement is that SP does

not have its own accounting system. The integrity and soundness of an
accounting system is crucial for a listed company. Hence, the Board needs to
direct the design and implementation of a sound accounting and risk
management system.

c. Accounting policies: policies and procedures are currently based on head

knowledge. This is not reliable and the Board will need to direct the
development of written policies and procedures for accounting and all other
important operational areas.

© 2018 Singapore Accountancy Commission Page 30 of 58

Question 1(c) cont.

d. Responsibility over procurement: Currently the Finance department is also

responsible for most of the procurement activities. The ARC may recommend
that a separate procurement department be established and the head of
procurement report to a separate person, perhaps directly to one of the EDs.
Following that, the Finance Department will only have financial control
oversight over procurement, including ensuring the relevant procurement
policies are developed and implemented. An opportune time for this re-
assessment would be after there has been a thorough internal review of the
procurement cycle.

e. Cost accounting: There were audit adjustments made by the external

auditors due to cost accounting errors in work-in-progress and finished
inventories. These errors have significant financial impact and ARC should
satisfy themselves that the cost accounting process is enhanced to avoid
recurring audit adjustments. ARC may need the consultants to review and
recommend improvements to the current process.

f. Enterprise Risk Management: Risk management is an area that the current

Board gives very little attention to. However, as a listed company, the Board,
with the concurrence of the ARC, will need to opine on the adequacy of
controls addressing financial risks. Hence the ARC will need to drive the
implementation of an enterprise risk management and Board assurance
framework to ensure that there is a robust ERM process in place which is kept
alive and able to support the SGX 1207 (10) opinion that the Board will need to
make.

© 2018 Singapore Accountancy Commission Page 31 of 58

Question 2

(a) Given that the procure-to-pay (including inventory management) process is key
to the business, the Audit & Risk Committee (ARC) will need to understand and
appreciate the relevant risks.

(i) Identify SIX risk events relevant to Solar Pals Pte Ltd’s current procure-to-pay
cycle (including inventory management); (6 marks)

Examples of key risks events

 Risk of raw materials not being purchased at competitive prices
 Risk of Foreign Exchange Losses
 Risk of Theft of Inventory from the factory store
 Poor quality of materials supplied
 Risk of Fraudulent Payments
 Risk of Inaccurate or Erroneous Production Reports
 Risk of Deterioration in Product Quality/Increase in Level of Rejects
 Risk of Accidents on the Factory Floor
 Risk of Non-compliance with Labour Laws

© 2018 Singapore Accountancy Commission Page 32 of 58

Question 2

(a) Given that the procure-to-pay (including inventory management) process is key
to the business, the Audit & Risk Committee (ARC) will need to understand and
appreciate the relevant risks.

(ii) For each risk event identified in (i) above, propose and justify ONE key risk
indicator. (6 marks)

Key risk indicators (KRIs)

Risk: Raw Materials may not be purchased at competitive prices

KRIs:
 number of purchases with no competitive quotes available – this enables
management to assess whether there is a trend towards avoiding use of
competitive quotes.
 top 5 suppliers where requests were received to waive competitive quotes –
this enables management to assess whether any particular vendor is being
preferred over others and to review the prices charged by them.

Risk: Risk of Foreign Exchange Losses

KRIs:
 value of unhedged foreign currency commitments per month – this enables
management to assess the impact of unhedged commitments given exchange
rate volatility.

Risk: Risk of Theft of Inventory from the factory store

KRIs:
 value of shortages reported in monthly stock count – this enables
management to observe and investigate the underlying reasons for the trend
of shortages.
 unexplained variances between inventory withdrawn for production and actual
quantity of finished products – this enables the underlying reasons for the
variances to be investigated as stock pilferages may be disguised as inventory
withdrawn for production.

© 2018 Singapore Accountancy Commission Page 33 of 58

Question 2(a)(ii) cont.

Risk: Poor quality of materials supplied

KRIs:
 number and value of rejects as a percentage of monthly production – this
enables management to investigate and assess whether rejects were due to the
quality of raw materials.
 production wastage versus value of finished goods produced per month – this
enables management to investigate whether wastage was due to raw material
specifications;
 number of unhappy customers, returned goods (faulty), warranty requests
– this trend enables management to investigate the robustness/reliability of
quality control checks.

Risk of Fraudulent Payments

KRIs:
 number and value of unreconciled differences in bank reconciliation –
unexplained payments appearing in bank statements may indicate fraudulent
payments.
 value of unexplained inventory shortages – unexplained shortages may
indicate inventory pilferage.

Risk of Inaccurate or Erroneous Production Reports

KRIs:
 unexplained variances between inventory withdrawn for production and
actual quantity of finished products – the trend in unexplained variances may
indicate, amongst others, that there may be errors in generating the production
reports.
 unexplained variances between standard unit cost of production and actual
cost of production - the trend in unexplained variances may indicate, amongst
others, that there may be errors in generating the production reports.

© 2018 Singapore Accountancy Commission Page 34 of 58

Question 2(a)(ii) cont.

Risk of Deterioration in Product Quality/Increase in Level of Rejects

KRIs:
 production wastage versus value of finished goods produced per month –
an increasing level of wastage may indicate that the quality of production is
worsening, and potentially impacting on the quality of finished goods.
 number and value of rejects as a percentage of monthly production – an
increasing level of rejects may indicate that the quality of production is
worsening, and potentially impacting on the quality of finished goods.
 number of hours of absenteeism per week/month – a worsening trend in
absenteeism may have an impact on pressure to complete production runs
and on quality control.
 machine down-time hours per month – trend in machine down-time hours may
indicate poor machine maintenance which will impact on quality of production.
 number of unhappy customers, returned goods (faulty), warranty requests –
trend in the level of complaints, returned goods or warranty requests indicate
quality of finished goods is deteriorating.

Risk of Accidents on the Factory Floor

KRIs:
 reduction in safety training hours per worker – a cut in safety training hours
will potentially lead to workers being less safety conscious and less familiar
with safety procedures.
 reduction in machine maintenance hours – reduction in maintenance may
lead to faulty machines where failure may lead to injuries.
 number of accidents per month separated between minor (no hospitalisation)
and major (hospitalisation) accidents – number of accidents is a lagging indicator
of safety lapses.
 number of safety breaches per month – trend in safety breaches, even if minor,
is an indication of accidents waiting to happen.

© 2018 Singapore Accountancy Commission Page 35 of 58

Question 2(a)(ii) cont.

Risk of Non-compliance with Labour Laws

KRIs:
 reduction in training hours per worker – increasing reduction hours may
indicate that workers are less trained and potentially will require more time to
complete production.
 number of overtime hours work per worker per week/month – increasing trend
of overtime hours highlights the risk of breaching statutory limits on overtime
worked.
 number of unfilled vacancies on production floor per week/month – number of
unfilled vacancies invariably indicates that existing workforce will need to
work longer hours to achieve the same level of production, thus increasing the
risk of breaching statutory limits on overtime hours per worker.

© 2018 Singapore Accountancy Commission Page 36 of 58

Question 2

(a) Given that the procure-to-pay (including inventory management) process is key
to the business, the Audit & Risk Committee (ARC) will need to understand and
appreciate the relevant risks.

(iii) For each risk event identified in (i) above, propose ONE risk response to mitigate
the risk. (12 marks)

Key Risks events and Related Controls

Risk that raw materials are not purchased at competitive prices

Materials are currently purchased from four suppliers due to long-term relationships.
Control procedures should be introduced to increase the number of suppliers and
implement a policy requiring competitive quotes to be obtained from, for example,
3 suppliers for every procurement (or a fixed-term contract awarded via tender).

Risk of Foreign Exchange Losses

SP transacted in various foreign currencies, namely, Euro, RMB and S$ whereas its
reporting currency is in S$. The company is therefore exposed to the risk of foreign
exchange fluctuations and will incur foreign exchange losses if these exposures are
not properly managed. SP needs to establish a foreign exchange hedging policy
including the types of financial instruments that are approved to be used for hedging
purposes, the level of unhedged exposure allowed, etc. Foreign currency exposure
will also need to be reported regularly to the Board.

Risk of Theft of Inventory from the factory store

The Inventory manager is responsible for receiving raw materials and also approving
the withdrawal of raw materials from the warehouse. There is no regular inventory
count. Segregating the responsibilities of the inventory manager so that he/she
does not both receive and authorise withdrawal of materials. Institute regular
inventory counts to be conducted by people independent of the warehousing staff.

© 2018 Singapore Accountancy Commission Page 37 of 58

Question 2(a)(iii) cont.

Risk of poor quality of materials supplied

The four current suppliers have been consistently used because of their relationship
with the EDs. A policy should be implemented whereby a supplier evaluation is
conducted regularly on these suppliers and all future new suppliers. In addition, a
blacklist should be maintained of suppliers consistently failing on quality.

Risk of Fraudulent Payments

The inventory manager receives and checks the materials purchased after which
he/she forwards the Goods Received Docket to the Finance Department in Singapore
for payment. He/she is also responsible for approving the transfer of raw materials.
There is a risk of fictitious payments being made for goods that were not received.
Control procedures include segregating the duties of the inventory manager such
that he is not in a position to both receive the raw materials and approve the transfers.

Risk of Inaccurate or Erroneous Production Reports

These reports are prepared by a production staff in China and submitted directly to
Jennifer for review. The reports should be independently checked and approved
by a manager in China before being sent to Singapore.

Risk of Deterioration in Product Quality/Increase in Level of Rejects

High turnover may lead to this risk materialising. Management needs to ensure that
all new factory workers are fully trained and closely supervised while on the
factory floor.

Risk of Accidents on the Factory Floor

High turnover translates to more new workers on the factory floor which may increase
accident risk. All safety measures must be re-iterated daily to all staff before the
commencement of work each shift. All new staff must complete a safety course
particularly in the use of machinery.

© 2018 Singapore Accountancy Commission Page 38 of 58

Question 2(a)(iii) cont.

Risk of Non-compliance with Labour Laws

This relate to compliance with China’s labour laws on overtime hours and safety
measures. Control procedures relevant to this area include (a) monitoring the
overtime worked for each worker; (b) increasing the level of factory floor
inspection to ensure workers are aware of safety procedures and observing these
procedures.

© 2018 Singapore Accountancy Commission Page 39 of 58

Question 3

(a) Give FOUR reasons why being located in Singapore adds value to Solar Pals
Pte Ltd and ONE reason why being located in Singapore reduces value for Solar
Pals Pte Ltd. (5 marks)

Reasons why value is added for location in Singapore

 The entity can avail of a lower tax rate.
 The entity can avail of a mature logistics industry.
 The entity can avail of government incentives targeting the sector.
 Singapore is the hometown of the founders.
 The entity can seek funding from a well-developed PE or VC sector.
 The entity can seek funding from a well-regulated exchange such as a Catalist.

Reasons why value is not added for location in Singapore

 The high administrative costs may sharply reduce value

© 2018 Singapore Accountancy Commission Page 40 of 58

Question 3

(b) Estimate the fair value of the straight-bond portion of the convertible bond as of
1 November 20x7 in Singapore dollars. Your workings should include an
assessment of the credit rating for the convertible bond, the relevant risk-free
rates for each coupon date, and the risk-adjusted rates or discount factors for
each coupon date. Present your answers to the nearest dollar.
(15 marks)
𝑵𝑶𝑷𝑨𝑻
SP Return on Assets = 𝑺𝒂𝒍𝒆𝒔 × 𝑨𝒔𝒔𝒆𝒕 𝒕𝒖𝒓𝒏𝒐𝒗𝒆𝒓
(0.5 mark for writing the formula of ROA)
𝐍𝐎𝐏𝐀𝐓
= 13%
𝐒𝐚𝐥𝐞𝐬
(0.5 mark for the value of NOPAT/Sales)
Asset Turnover = 0.4
(0.5 mark for the value of asset turnover)
SP Return on Assets = 13% X 0.4 = 5.2%
(0.5 mark for the final answer)
𝐄𝐁𝐈𝐓 𝐏𝐁𝐓 𝟏 𝐍𝐎𝐏𝐀𝐓 𝐍𝐞𝐭 𝐩𝐫𝐨𝐟𝐢𝐭
Interest / Sales = 𝐬𝐚𝐥𝐞𝐬 − 𝐬𝐚𝐥𝐞𝐬 = 𝟏−𝐄𝐓𝐑 × [ 𝐬𝐚𝐥𝐞𝐬 − ]
𝐬𝐚𝐥𝐞𝐬
(0.5 mark for writing the formula of Interest/Sales)
𝟏 𝟏
= 𝟏−𝟏𝟕% (0.5 mark for substituting the right value)
𝟏−𝐄𝐓𝐑
𝐍𝐎𝐏𝐀𝐓 𝐍𝐞𝐭 𝐩𝐫𝐨𝐟𝐢𝐭
[ 𝐬𝐚𝐥𝐞𝐬 − 𝐬𝐚𝐥𝐞𝐬 ]= 13% - 5%
(0.5 mark for substituting the right value)
𝟏
Interest / Sales = 𝟏−𝟏𝟕% X (13% - 5%) = 9.63%
(0.5 mark for the final answer)
𝐄𝐁𝐈𝐓 𝟏
( ) 𝐍𝐎𝐏𝐀𝐓
𝐬𝐚𝐥𝐞𝐬 𝟏−𝐄𝐓𝐑
EBIT / Interest = 𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭 = × 𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭
𝐬𝐚𝐥𝐞𝐬 ( )
𝐬𝐚𝐥𝐞𝐬 𝐬𝐚𝐥𝐞𝐬
(0.5 mark for writing the formula of EBIT interest cover)
𝐍𝐎𝐏𝐀𝐓
= 13%
𝐬𝐚𝐥𝐞𝐬
(0.5 mark for substituting the right value)
𝟏 𝟏
𝟏−𝐄𝐓𝐑 𝟏−𝟏𝟕%
𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭 =
( ) 𝟗.𝟔𝟑%
𝐬𝐚𝐥𝐞𝐬
(0.5 mark for substituting the right value)
𝟏

EBIT / Interest = 13% X 𝟏−𝟏𝟕% = 1.625

𝟗.𝟔𝟑%
(0.5 mark for the final answer)
Present value of the bond in S$'000 = 9,258.729

© 2018 Singapore Accountancy Commission Page 41 of 58

Question 3(b) cont.
𝑁𝑂𝑃𝐴𝑇
𝑆𝑜𝑙𝑎𝑟 𝑃𝑎𝑙𝑠 𝑅𝑂𝐴 = × 𝐴𝑠𝑠𝑒𝑡 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟
𝑆𝑎𝑙𝑒𝑠

= 13% X 0.4 =5. 2%.

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝐵𝐼𝑇 𝑃𝐵𝑇 1 𝑁𝑂𝑃𝐴𝑇 𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡

= 𝑠𝑎𝑙𝑒𝑠 − 𝑠𝑎𝑙𝑒𝑠 = 1−𝐸𝑇𝑅 × [ − ]
𝑠𝑎𝑙𝑒𝑠 𝑠𝑎𝑙𝑒𝑠 𝑠𝑎𝑙𝑒𝑠

1
=1−17% × [13% − 5%] = 9.63%.

𝐸𝐵𝐼𝑇 1
𝐸𝐵𝐼𝑇 ( ) 𝑁𝑂𝑃𝐴𝑇
𝑠𝑎𝑙𝑒𝑠 1−𝐸𝑇𝑅
= 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = × 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑠𝑎𝑙𝑒𝑠 ( )
𝑠𝑎𝑙𝑒𝑠 𝑠𝑎𝑙𝑒𝑠
1
1−17%
= 13% × = 1.625.
9.63%

DCF
[A] * [E]
Cash Risk- Risk adjustment Risk- [allow
flow Interpolation free [allow error carry- adjusted error
(S$’000) [B] rate forward from C] DF carry-
[A] [C] [D] [E] forward
from B]
[F]
0.016 + (0.018 - 1/(1+(0.01733 +
220 0.01733 0.96650 212.630
0.016)/181 * 120 0.052)/2)^(0.5 * 2)
0.018 + (0.018 - 1/(1+(0.018 +
220 0.01800 0.93351 205.372
0.018)/184 * 123 0.052)/2)^(1.0 * 2)
0.018 + (0.018 - 1/(1+(0.018 +
220 0.01800 0.90194 198.427
0.018)/181 * 120 0.052)/2)^(1.5 * 2)
0.018 + (0.018 - 1/(1+(0.018 +
220 0.01800 0.87144 191.717
0.018)/184 * 123 0.052)/2)^(2.0 * 2)
0.018 + (0.020 - 1/(1+(0.01933 +
220 0.01933 0.83927 184.640
0.018)/182 * 121 0.052)/2)^(2.5 * 2)
0.020 + (0.020 - 1/(1+(0.02 +
10,220 0.02000 0.80880 8,265.942
0.020)/184 * 123 0.052)/2)^(3.0 * 2)

© 2018 Singapore Accountancy Commission Page 42 of 58

Question 4

(a) Estimate the Free Cash Flow to the Firm (FCFF) for Solar Pals Pte Ltd for each
of the years 20x7 through 20y1 measured in thousands of Singapore dollars
using a Discounted Cash Flow (DCF) valuation of Solar Pals Pte Ltd with 20y1
as the terminal year. Present your answers in the nearest thousand Singapore
Dollars. (12 marks)

Sales (S$’000)
20x7 20x8 20x9 20y0 20y1
20,711 21,031 16,750 17,734 18,745
Total Production costs (S$’000)
20x7 20x8 20x9 20y0 20y1
3,948 3,911 3,909 3,930 3,910
Admin costs at HQ (S$’000)
20x7 20x8 20x9 20y0 20y1
2,500 2,500 2,500 2,500 2,500
Level of working capital in S$’000 = (3% x Revenue)

Level of working capital in S$’000

20x7 20x8 20x9 20y0 20y1
NA 631 502 532 562
Changes in working capital in S$’000
= (current year working capital - prior year working capital)
Changes in working capital in S$’000
20x7 20x8 20x9 20y0 20y1
0.000 0.000 (128) 30 30
Capital expenditure in RMB ’000
for 20y1 = 20% x 16,250
Capital expenditure in RMB ’000
20x7 20x8 20x9 20y0 20y1
0 0 0 16,250 3,250
Capital expenditure in S$’000 for translating capital expenditure
using respective forward exchange rates.
Capital expenditure in S$’000
20x7 20x8 20x9 20y0 20y1
0 0 0 3,124 611
EBITDA in S$’000
= (Sales – production costs – administrative costs)

© 2018 Singapore Accountancy Commission Page 43 of 58

 EBITDA in S$’000
20x7 20x8 20x9 20y0 20y1
14,263 14,620 10,341 11,304 12,335

Capital allowances in S$’000

20x7 20x8 20x9 20y0 20y1
0 0 0 3,124 611

NOPAT in S$’000 = (EBITDA – capital allowances) x 0.83

NOPAT in S$’000
20x7 20x8 20x9 20y0 20y1
11,838 12,135 8,583 6,789 9,731
ADD: Capital allowances in S$’000
20x7 20x8 20x9 20y0 20y1
0 0 0 3,124 611
LESS: Change in working capital in S$’000
20x7 20x8 20x9 20y0 20y1
0 0 (128) 30 30
Less: Capital expenditure in S$’000
20x7 20x8 20x9 20y0 20y1
0 0 0 3,124 611
FCFF in S$’000 (First year is replaced by 2/12 of the full-year FCFF)
20x7 = 1,973
FCFF in S$’000 – 20x8 = 12,135
FCFF in S$’000 – 20X9 = 8,711
FCFF in S$’000 –20y0 = 6,760
FCFF in S$’000 – 20y1 = 9,700

© 2018 Singapore Accountancy Commission Page 44 of 58

SALES COMPUTATION
Sales (S$’000)

20x7 20x8 20x9 20y0 20y1

20,711 21,031 16,750 17,734 18,745

PRODUCTION COST COMPUTATION (EXCLUDING CAPEX)

Total production costs (S$’000)

20x7 20x8 20x9 20y0 20y1

3,948 3,911 3,909 3,930 3,910

ADMINISTRATIVE EXPENSES
Admin costs at HQ (S$’000)

20x7 20x8 20x9 20y0 20y1

2,500 2,500 2,500 2,500 2,500

WORKING CAPITAL
Level of working capital in S$’000 (3% of sales revenue)

20x7 20x8 20x9 20y0 20y1

NA 631 502 532 562
Changes in working capital in S$’000

20x7 20x8 20x9 20y0 20y1

0.000 0.000 (128) 30 30

CAPEX
Capital expenditure in RMB ’000 (replace last year by depreciation level 20% for
terminal value calculation)

20x7 20x8 20x9 20y0 20y1

0 0 0 16,250 3,250

Capital expenditure in S$’000 [1]

20x7 20x8 20x9 20y0 20y1

0 0 0 3,124 611

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Question 4(a) cont.
FCFF COMPUTATION
EBITDA in S$’000 (Sales – production costs – administrative costs)

20x7 20x8 20x9 20y0 20y1

14,263 14,620 10,341 11,304 12,335

Capital allowances in S$’000

20x7 20x8 20x9 20y0 20y1

0 0 0 3,124 611

NOPAT in S$’000 (EBITDA – capital allowances) x 0.83

20x7 20x8 20x9 20y0 20y1

11,838 12,135 8,583 6,789 9,731

ADD: Capital allowances in S$’000

20x7 20x8 20x9 20y0 20y1

0.00 0.00 0.00 3,124 611

LESS: change in working capital in S$’000

20x7 20x8 20x9 20y0 20y1

0 0 (128) 30 30

LESS: Capital expenditure in S$’000

20x7 20x8 20x9 20y0 20y1

0.00 0.00 0.00 3,124 611

FCFF in S$’000 (First year is replaced by 2/12 of the full-year FCFF)

20x7 20x8 20x9 20y0 20y1

1,973 12,135 8,711 6,760 9,700

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Question 4

(b) Compute the unlevered cost of equity for each of the years 20x7 through 20y1
for Solar Pals Pte Ltd as of 1 November 20x7. Your calculations should reflect
the varying risk-free rate for different years rather than assuming a constant
discount rate. Your calculations should be useful for discounting Free Cash Flow
to the Firm (FCFF) under an Adjusted Present Value (APV) model. Present your
answers as a percentage correct to three decimal places. (5 marks)

Maturities in years (mid-year convention)

20x7 20x8 20x9 20y0 20y1
1/12 year 1/6 + 0.5yr 1/6 + 1.5yr 1/6 + 2.5yr 1/6 + 3.5yr
Maturities in years (mid-year convention)
20x7 20x8 20x9 20y0 20y1
0.083 0.667 1.667 2.667 3.667
Corresponding risk-free rates (as percentages)
20x7 20x8 20x9 20y0 20y1
1.600% 1.800% 1.800% 2.000% 2.000%

Beta = 0.73000 (Median of guideline asset betas; mean is also okay)

Risk-adjusted cost of equity

= (Risk-free rate + 0.73 * 0.08)
Risk-adjusted cost of equity
20x7 20x8 20x9 20y0 20y1
7.440% 7.640% 7.640% 7.840% 7.840%

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Question 4(b) cont.

COST OF EQUITY AND PRESENT VALUE COMPUTATIONS

Maturities in years of FCFF in S$’000 (mid-year convention)

20x7 20x8 20x9 20y0 20y1

83 667 1,667 2,667 3,667

Corresponding risk-free rates (as decimals)

20x7 20x8 20x9 20y0 20y1

1.600% 1.800% 1.8000 2.000% 2.000%

Beta = 0.73000 (Median of guideline asset betas; mean is also okay)

Risk-adjusted cost of equity (decimal)= (Risk-free rate + 0.73 * 0.08)

20x7 20x8 20x9 20y0 20y1

7.440% 7.640% 7.640% 7.840% 7.840%

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Question 4

(c) Estimate the fair price per Solar Pals Pte Ltd share in Singapore dollars as of 1
November 20x7 using an Adjusted Present Value (APV) approach. For this sub-
part only, you may assume that the fair value of the entity’s debt is S$9.3 million
as of 1 November 20x7. Present your answers correct to three decimal places.
(5 marks)

Terminal value = 123,852 = (9,700.331 * 1.001) / (0.0794 - 0.001)

0.0794 = 0.021 + 0.73 * 0.08

Discounted cash flows (S$’000)

20x7 20x8 20x9 20y0 20y1

1,961 11,553 7,705 5,527 101,265

Unlevered enterprise value (S$’000)

128,012

Value of tax shield (S$’000): 1,581 = (0.17 * 9,300)

Levered enterprise value (S$’000): 127,002

= (0.98 * (128,012 + 1,581))

Equity value (S$’000)

117,702 = (127,002 - 9,300)

Equity value per share: 1.177 (117,702/100,000)

© 2018 Singapore Accountancy Commission Page 49 of 58

Question 4(c) cont.

Terminal value: 123,852 (9,700 * 1.001) / (0.0794 - 0.001)

(0.0794 = 0.021 + 0.73*0.08).

Discounted cash flows

20x7 20x8 20x9 20y0 20y1

1,961 11,553 7,705 5,527 101,265

Unlevered enterprise value (S$’000): 128,012

Value of tax shield (S$’000): 1,581 (0.17 * 9,300)

Levered enterprise value (S$’000): 127,002 (0.98 * (128,012+1,581))

Equity value (S$’000): 117,702 (127,002 – 9,300)

Equity value per share: 1.177 (117,702/100,000)

© 2018 Singapore Accountancy Commission Page 50 of 58

Question 4

(d) Compare the estimated share price calculated in (c) above to the conversion
price of the convertible bond and comment on the possible rationale behind the
terms of the convertible bond deal from the viewpoint of Solar Pals Pte Ltd.
(8 marks)

Conversion price of convertible bond: $1 (9.6 / 9.6)

The equity value per share of 1.177 is higher than the conversion price but by only
around 18%.

18% suggests low potential upside for the PE firm compared to such typical situation.

Alternative answer: 18% may indicate that the valuation is too conservative relative
to the PE firm’s likely level of expectations.

SP can conserve its cash flow if the bond is converted.

SP can attract more capital than it would with a straight bond (a conventional fixed
rate bond) since Sing PE would also pay for the conversion option (premium).

SP may be able to pay a lower coupon than it would with a straight bond (a
conventional fixed rate bond).

SP is a relatively young company with an unknown credit history (or no credit

history at all as it has no debt apart from A/P payments) but has high growth potential,
offering a convertible bond might make SP a more attractive investment
opportunity.

The interest paid on convertible bonds is tax deductible, which lowers the cost of
capital for SP whereas the cost of raising funds via equity is not tax deductible and
takes longer to arrange.

END OF PAPER

© 2018 Singapore Accountancy Commission Page 51 of 58

Section 6

Common Examination Verbs

To assist Candidates to best formulate their answers they will be given the following
list of common verbs and their descriptions.

As an aspiring Chartered Accountant of Singapore, you must be able to

communicate clearly, concisely, and professionally in order to work effectively with
others.

Apart from testing your technical ability, the Singapore CA Qualification

examinations are also assessing your communication skills, in particular, your ability
to frame your answers using language that is clear to a layperson. Obviously, when
marking the answer scripts, markers are looking for accurate answers that are
focused on the question asked, but they are also looking for answers that convey
information in a way that others can easily understand and that show a deep
appreciation for any ethical and professional issues posed.

The following list of commonly used verbs ("action" words) will help you identify what
the examiner expects from your answer and how you can maximise your marks.
You will see that some of these verbs are quite similar and some are even
interchangeable. The irony is that most questions in an examination paper will not
contain a question mark, so you have to be able to determine what the examiner
wants by picking out the verb in the instruction.

Account Account requires you to show how to record an element in the

financial statements appropriately. This might be by means of a
journal entry, T-account, or an extract from the financial
statements. Remember, a journal or a T-account is only
complete if it shows the date of the entry, the correct accounts,
the correct amounts, and has a description (narration) - easy
marks are often thrown away through carelessness.
Advise / Give As a Chartered Accountant of Singapore, your work will invariably
advice require you to form an opinion about the most appropriate course
of action, or offer alternative courses of action depending upon
the situation. This type of question requires you to give specific
guidance to an individual or a group (e.g. a taxpayer, audit client,
management, etc.), so your answer must provide specific
information or make a recommendation tailored to the individual
or group.
Analyse Identify the key components, look for similarities and differences,
look for patterns or outliers, and weight up the issues. If there is
numerical data, you might need to provide a range of answers
depending on how you substitute the data into your model. Make
sure you state any implications of your answer and any
assumptions that you make.

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 Apply This instruction requires you to relate your answer back to a
specific document/s or set of facts. Alternatively, you may be
required to use a specific formulae, model, or process. For
instance, "Apply the relevant Singapore Financial Accounting
Standard to …". Another example would be "Apply the rules for
recording and reporting foreign currency transactions …". Apply
and With reference to are similar.
Appraise Make a judgment about the value, quality, outcomes, results, or
size. Often there will be a qualifier in the instruction, which will
tell you exactly what to appraise. For instance, "Appraise
Company X's credit worthiness …". Professional scepticism and
professional judgment are called for when making an appraisal.
Appraise and Assess are interchangeable.
Assess Make a judgment about the value, quality, outcomes, results, or
size. Often there will be a qualifier in the instruction, which will
tell you exactly what to assess. For instance, "Assess the
adequacy of the disclosures in the financial statements relating
to …". Professional scepticism and professional judgment are
called for when making an assessment. Appraise and Assess
are interchangeable.
Bullet points Unless specifically asked for, only use bullet points in your
answer as an absolute last resort if you are running out of time.
A quarter of a mark is better than zero.
Calculate / Do the number crunching and derive the correct answer. Make
Compute sure that you write down your workings and crosscheck your
numbers.
Comment Comment is similar to evaluate in that you are required to make
a judgment or provide your opinion based on the facts at hand.
Professional scepticism and professional judgment are called for
when commenting.
Compare and Compare requires you to show how things are similar and/or
Contrast different while contrast requires you to show how things are
different or opposite. Even if you are asked just to compare, you
must indicate both the similarities and differences.
Critically Critically requires that your answer be more extensive than if
(analyse / you were asked to analyse or evaluate the data. Your answer
evaluate) must add a greater degree or level of accuracy, depth,
knowledge, understanding, logic, questioning, reflection, and
quality to your analysis or evaluation.

Remember, critically requires you to consider both the positive

and negative points and apply professional scepticism (a
questioning mind) in conjunction with professional judgment.
Often when an examiner asks you to critically evaluate or
analyse something it is because there can be more than one

© 2018 Singapore Accountancy Commission Page 53 of 58

 right answer, so you have to convincingly defend your opinion as
part of your answer.
Define Like list, you are most unlikely to ever be asked just to define a
term, particularly in an open-book examination unless it is a term
that requires you to communicate your understanding rather than
copying down someone else's definition. For instance, "Define
in your own words …".
Demonstrate Demonstrate requires you to prove or disprove something
beyond any doubt, or show that it applies in the situation
described by giving evidence (for instance, provide an example).
The evidence can be from the facts given or from your general
knowledge and experience. Demonstrate and Illustrate are
similar.
Describe Describe requires you to provide the characteristics and features
of an item or situation. For instance, "Describe the audit
procedures to verify …" requires you to state the specific audit
procedure/s that you would use without going into step-by-step
detail of how to perform that procedure.
Detail Detail requires you to give very specific instructions or advice.
For instance, "Detail the audit procedures to verify ..." requires
you to provide step-by-step instructions. Another example is
"Detail how the findings from the site visit will affect the planning
of the statutory audit". This instruction requires you to state the
positive and negative consequences in relation to the site visit
and the planning of the audit. Don't forget to think about the
future and the past, not just the present when stating the
consequences.
Discuss Discuss requires you to provide the for and against arguments,
you cannot have a discussion without opposing views otherwise
it would be just a conversation. If discuss is placed near the
front of the instruction, then it requires you to provide an answer
that is similar to explain, but addresses the for and against
arguments. For instance, "Discuss why numerical valuation is
essential when buying or selling a small business".

However, if there is a statement and discuss is placed at the

end, your answer must be in the form of an essay with the
following elements:

 An introduction, which declares whether you agree,

disagree, partly agree, or partly disagree with the
statement;
 The body of your answer, stating: i) Why it is possible to
agree and ii) why it is possible to disagree with the
statement. You should provide examples to support both
points of view; and

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  A conclusion that proves your original position.

An example of a discuss question that requires an essay style

answer would be "Numerical valuation is not essential when
buying or selling a small business because the actual selling
price is the outcome of negotiation. Discuss".
Distinguish To note differences between. For instance, "Describe what is
meant by the term tax planning and distinguish it from tax
evasion". Apart from describing what tax planning involves (1-2
marks max), you need to explain how the two terms are different
and how they are similar. However, providing a list of differences
and similarities is insufficient - complete sentences are essential.
In addition, it is important that you also mention any other
relevant factors (e.g. the ethical and legal issues).
Evaluate Pass judgment on or provide your opinion based on the facts at
hand. When making an evaluation, there are often
predetermined criteria that you will use to base your opinion on.
The key here is to give your opinion or make a judgment of the
facts, but providing just a description of the facts is insufficient.
Professional scepticism and professional judgment are called for
when making an evaluation. Examine and Evaluate are
interchangeable.
Explain As a Chartered Accountant of Singapore, you will be frequently
called upon in your work to explain difficult concepts and
technical issues to people who are not accounting trained. This
is where your ability to share your knowledge using simple
everyday terms will be most needed.

Explain requires you to write at least several sentences

conveying how you have analysed and synthesised the
information in a way that a layperson can easily understand the
concept or grasp the technical issue at hand. For instance,
"Explain whether an 'emphasis of matter' paragraph or an 'other
matter' paragraph would be most appropriate in this instance", or
"Explain how a partnership is assessed for tax".
Examine Pass judgment on or provide your opinion based on the facts at
hand. When examining the facts given, there are often
predetermined criteria that you will use to base your opinion on.
The key here is to give your opinion or make a judgment of the
facts, but providing just a description of the facts is insufficient.
Professional scepticism and professional judgment are called for
when making an evaluation. Examine and Evaluate are
interchangeable.
Identify Identify is similar to list, but requires you to also provide an
explanation as to why the item that you have identified is
relevant to the facts given in the question.

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 Often identify will require you to select a specific issue or issues,
but not all issues, so you need to look out for any qualifying
words. For instance, "Identify the Board Matters …" is asking
you to focus solely on issues that relate to Board Matters so if
you digress and identify remuneration issues, you will not score
well. Another example is "Identify the companies that qualify as
members of the group for the purposes of group tax relief". In
order to score well in this second example, you need to identify
the companies and state why they are included in the group. You
also need to state if a company is not included and why.
Justify Whenever you see the word justify you must provide reasons for
your answer, in other words, provide support for your argument
or conclusion. If you fail to justify your answer, you will lose
valuable marks.
Illustrate / Give Illustrate requires you to provide an example, either from the
examples facts given, a real-life example or a made up example to
illustrate the point you are trying to make. Illustrate and
Demonstrate have similarities.
List Prepare an itemised list. Although you are unlikely to ever be
asked just for a list of items, it is important to remember that
many of the common verbs used by examiners require you to
begin with a mental list of issues to address.
Outline Outline requires you to provide a general overview of the
situation and indicate the main features. Outline is used when
the question is worth only a couple of marks, but a single
sentence is usually never enough to achieve full marks.
Prepare Prepare requires you to produce your answer using a specific
format. For instance, "Prepare the Statement of Cash Flows
for …" or "Prepare all the relevant journals …". Remember, a
journal is only complete if it shows the date of the entry, the
correct accounts, the correct amounts, and has a description
(narration) - easy marks are often thrown away through
carelessness.
Propose Put forward (for example, a point of view, idea, argument,
alternatives, etc.) for consideration or action. For instance,
"Based on the facts of the case, propose the most tax-effective
vehicle …", or "Propose audit adjusting entries to correct …".
Quantify Provide a numerical value (an exact calculation) or a range of
values (upper/lower limits, average, likely values, etc.). For
instance, "Quantify the misstatement in the 'investment in
subsidiary' in the Statement of Financial Position". As with
calculate and compute, you should always show your workings
and crosscheck your numbers.

© 2018 Singapore Accountancy Commission Page 56 of 58

 Record Record is similar to prepare in that you may need to perform a
calculation and show the specific components in an appropriate
format. For instance, "Record the fair value gain/loss and
indicate if the gain/loss is recognised as profit or loss or other
comprehensive income".
Recognise Recognise requires you to distinguish between various
components and to be able to state how each component should
be treated. For instance, "… and indicate if the gain/loss is
recognised as profit or loss or other comprehensive income".
Identify and Recognise have similarities.
Recommend Make a statement about the most appropriate course of action.
If there is more than one possible course of action, state which
action you would choose and why (justify your choice). Your
professional judgment and your ability to analyse and synthesis
the wider situation are critical to scoring well in these types of
questions. Don't forget to think about the future and the past, not
just the present when making a recommendation.
Respond / This is your right of reply. When you are asked to respond, it is
Reply usually in reply to a comment made by someone else (although
you can also be asked how you would respond in a particular
situation). For instance, "Respond to the Chairperson regarding
her comment on impairment". Whenever you are asked to
respond, you must always justify your opinion or the actions you
would take.
Use / Using This instruction tells you the type of model that you must use
when formulating your answer. For instance, "Using the Market
Approach, …".
State State is similar to list, but the items require your professional
judgement. For instance, "State any restrictions that apply". One
of the easiest ways to make sure that you state comprehensively
is to think, "list AND justify". You will note that state appears in
many of the verb descriptions given.
Summarise Provide a concise description. Summarise is similar to
describe, but in a condensed format.
Synthesise Bring together the relevant elements to make a whole.
Synthesis is always required as part of an evaluation.
Synthesis is how you have made sense of (comprehended) the
facts of the case.
To what extent This instruction requires you to advance arguments in favour of
a position or point of view and respond to or take into
consideration the opposing arguments or points of view. You
must always justify your answer.
Translate For the purposes of the Singapore CA Qualification
examinations, translate refers to the conversion of data from one

© 2018 Singapore Accountancy Commission Page 57 of 58

 currency into another currency (although translate can refer to
spoken and written language as well).
With reference This instruction requires you to relate your answer back to a
to specific document/s or set of facts. For instance, "With
reference to relevant Singapore Financial Reporting Standards,
explain the risk of material misstatements relating to …". Failure
to make specific mention of the document/s or facts in your
answer will result in a substantial loss of marks.

END OF EXAMINER’S GUIDE

© 2018 Singapore Accountancy Commission Page 58 of 58