SECTION A – CASE QUESTIONS (Total: 50 marks)

Answer ALL of the following questions. Marks will be awarded for logical argumentation/
calculation and appropriate presentation of the answers.

CASE

Lucky Plc (''Lucky'') is a multi-national company that is renowned for organising and managing
mega events globally. The operation and management of mega events is very complicated
and susceptible to uncontrollable factors, such as adverse weather conditions and human
errors, causing monetary and non-monetary losses to Lucky. Lucky aims to become the top
global mega event organiser, providing excellent event organising and management services
to participants, sponsors, and advertisers. Lucky has been listed on the London Stock
Exchange for years and has a good credit rating in the industry.

Lucky has formulated a sophisticated business strategy and various processes to organise
and manage global mega events successfully in local and overseas territories via contractual
joint alliances with local event organising and management companies. Lucky is responsible
for the financial, organisational, and management duties of mega events, while the local event
organisers are responsible for the operation and implementation of mega events locally.
Since the Government of the Hong Kong SAR has been encouraging Hong Kong's mega
event economy, the management of Lucky has been evaluating whether they should
incorporate a subsidiary in Hong Kong to organise and manage mega events thereby
leveraging their global business networks and mega event management experience in London.
This is the first time that Lucky is considering establishing a subsidiary to start organising
and managing mega events in Hong Kong. Therefore, the CFO of Lucky has consulted
Mr Dragon, a practicing CPA and business consultant in Hong Kong, for advice on Lucky's
first international expansion and on the setting up of a new Hong Kong subsidiary (''HKS'').

During the interview with Lucky's management team, Mr Dragon found that Lucky has an
informal and flat organisation structure organised across different business units with different
cultures and styles for organising and managing different mega events. Each event
is organised and managed by one business unit, which is responsible for overseeing
the operational and financial performance of each event. Lucky uses a centralised enterprise
resources planning system in London to gather, analyse, and evaluate data and information
collected from local or overseas mega events. The system has also been linked with different
business partners to ensure all events are organised and managed smoothly and
systematically. However, the system has recently experienced several instances of
overloading due to the rapid expansion of the mega events businesses. Moreover, Lucky
has been developing a sophisticated ticket ordering system to sell event tickets and to collect
entrance fees online. The system is also used to collect advertising fees and sponsorships
from sponsors and advertisers at each event.

Module 12 (December 2024 Session) Page 1 of 7

Lucky's staff in the London office has been working closely with local and overseas business
partners to organise and manage mega events without hiring in-house staff for cost-saving
reasons. Lucky requires staff with different managerial and operational skill sets to organise
and manage mega events, and Lucky provides training to their staff in London, including
training for mega event management and the usage of the enterprise resource planning
systems. Lucky will evaluate the financial performance of HKS annually to determine
whether they will continue the operation of HKS in two to three years.

Organising and managing mega events requires a significant amount of investment because
Lucky must pay all suppliers in advance to reserve venues, publish promotion materials, set
up information systems, advertise mega events, and establish contacts with sponsors,
participants, and business partners. It takes at least six to eight months of advanced planning
to plan a mega event, and it also requires substantial cash outflow and capital investment.
The revenue from ticket sales, sponsorships, and advertisements are uncertain and depend
on any given event's attractiveness to the public and the ensuing general public response to
specific mega events. Moreover, the profitability of mega events may be affected by
uncontrollable factors, such as adverse weather conditions, which may result in Lucky having
to refund tickets to participants and partially to advertisers and sponsors if the event cannot
be successfully completed. These uncontrollable factors may also cause other monetary and
non-monetary losses to Lucky.

For the setup of HKS, Lucky intends to invest a lump sum of startup capital and expects that
the new subsidiary will be able to finance itself after the initial investment from Lucky.
Therefore, HKS must obtain additional financing to organise and manage mega events in
Hong Kong. Lucky predicts the capital market will be more active and equity value will
increase due to the expectation of reaching the interest rate ceiling, which may subsequently
decrease soon.

Lucky is considering investing £2 million as startup capital in HKS. The CFO is considering
the use of corporate bonds and convertible notes to finance the startup capital. Lucky is
considering issuing corporate bonds with a face value of £1,000, a 6% coupon rate per annum,
and a yield to maturity rate of 8% per annum, compounded semi-annually for two years. All
bond premiums or discounts will be amortised evenly during the period. Lastly, Lucky is
considering issuing 4% convertible notes at the rate of 20 ordinary shares per face value of
£1,000 for two years. The share price is expected to be £5 at the conversion date. Due to
the uncertain movements of interest rates, Lucky wants to minimise its interest payments and
its issuing and financing costs to finance the startup capital of HKS.

Module 12 (December 2024 Session) Page 2 of 7

Question 1 (15 marks – approximately 27 minutes)

Evaluate, with an appropriate strategic model, the internal factors of Lucky that may
help HKS organise and manage its mega events business successfully in Hong Kong.

Note: A maximum of 2 marks for analytical skills will be awarded.

(15 marks)

Question 2 (10 marks – approximately 18 minutes)

Acting as the financial controller of Lucky, write a report to the Board of Directors
of Lucky to evaluate the strategic risks, operational risks, and data security risks
of establishing a subsidiary to organise and manage a mega events business in
Hong Kong.

Note: A maximum of 2 marks for communication skills will be awarded.

(10 marks)

Question 3 (10 marks – approximately 18 minutes)

Evaluate with an appropriate framework that HKS could adopt to select appropriate
financing strategies in Hong Kong.
(10 marks)

Question 4 (15 marks – approximately 27 minutes)

Lucky is considering TWO financing options to finance the startup capital of HKS and
has consulted Mr Dragon for advice.

Required:

Acting as Mr Dragon,

(a) Calculate the price of the corporate bond issued, total interest payments, and
the bond carrying value after the total interest payment during the period.
(8 marks)

(b) Calculate the total interest payment, conversion price per share, conversion ratio,
and conversion value for the convertible notes.
(5 marks)

(c) Recommend, with justifications, an appropriate financing option for Lucky.

(2 marks)

* * * * * * * *
Module 12 (December 2024 Session) Page 3 of 7
End of Section A
SECTION B – ESSAY / SHORT QUESTIONS (Total: 50 marks)

Answer ALL of the following questions. Marks will be awarded for logical argumentation/
calculation and appropriate presentation of the answers.

Question 5 (15 marks – approximately 27 minutes)

Elite Limited (''Elite'') is an energy company based in France that would like to expand its
business in Asia. Elite would like to invest in an energy company in Hong Kong with an option
to be its board member so that Elite can learn and understand the Hong Kong market and
regulatory framework for possible future expansion. Elite has shortlisted an electricity
company, ''Target'', which is listed in Hong Kong and is willing to allow Elite to sit on its Board
with a minimum 6% shareholding.

Elite would like to use Target's market price trading at market equivalent to the Earnings-Based
models for valuation. However, Target disagrees with using this approach due to the
limitation on its profits, as Target operates as an electricity company in Hong Kong whose
profits are capped at 8% on its net fixed assets under the Scheme of Control Agreement with
the Government of the Hong Kong SAR. Additionally, Target's current market capitalisation
(i.e. Price Earning (''PE'') ratio) may not reflect Target's specialty.

Target's strategy is to achieve a 2% annual growth in profits by increasing their net fixed assets,
and Target has a highly consistent dividend distribution rate of 93% of its net profits, as
evidenced by its historical records. Therefore, Target believes that using the Dividend
Growth model would better reflect their potential for growth.

The cost of equity of Target is 7%, the latest net fixed assets of Target is HKD3,750 million,
and the PE ratio of Target is 14 times, as per the latest available information.

Required:

(a) Assume Target's net profits land at the capped 8% on its net fixed assets under
the Scheme of Control Agreement. Without any further adjustment, calculate
the consideration that Elite needs to pay to buy the shares of Target under

(i) the Earnings-Based model; and

(3 marks)

(ii) the Dividend Growth model.

(5 marks)

(b) Advise on the limitations of using the Dividend Growth model in this case.
(7 marks)

Module 12 (December 2024 Session) Page 5 of 7

Question 6 (19 marks – approximately 34 minutes)

Parrot Limited (''Parrot'') is a real estate developer listed on the Hong Kong Stock Exchange
(''HKEX'') that focuses on properties development in Hong Kong and Singapore, owning 30%
and 15% of the market share in Hong Kong and Singapore, respectively. The Chan family is
the major shareholder and owns 70% of Parrot. To diversify their geographic concentration
and increase their investment portfolio in Singapore, Parrot is exploring the possibility of
expanding their business in Singapore, and they are considering merging with a reputable
family-owned private real estate developer, Unique Property Limited (''Unique''), in Singapore.
Unique is wholly owned by the Tang family and has achieved 8% and 36% of the market share
in properties development in Hong Kong and Singapore, respectively.

Both the Chan family and the Tang family plan to leverage the current listing status of Parrot
in Hong Kong, so they plan to structure the transaction by first letting Parrot acquire 100% of
Unique with the consideration equal to Unique's latest valuation. 10% of the transaction
consideration would be paid by Parrot's existing cash, and the remaining 90% would be
financed by issuing a convertible bond of Parrot to Unique's shareholders (i.e. the Tang family),
which would allow them to convert to Parrot's share at HK$4 per share after one year.

The latest valuation of Unique is SG$20 billion. Below is an extract of the latest financial
information of Parrot and Unique:

Unique Parrot
SG$ million HK$ million
Revenue 5,000 36,000

Parrot
HK$
Share price 5.00
No of shared issued 25 billion

The exchange rate of the Singapore dollar to the Hong Kong Dollar is 1 SGD = 6 HKD.

Required:

(a) Calculate the shareholding in Parrot of the Tang family and the Chan family if
the convertible bond is fully converted after ONE year.
(5 marks)

(b) Advise on the respective legal framework (i.e. relevant law(s)) which governs
the merger and acquisition for the TWO jurisdictions.
(5 marks)

(c) Evaluate the above potential acquisition using the SIX assessment factors under
the reverse takeover (''RTO'') principle of the Listing Rules.
(9 marks)

Module 12 (December 2024 Session) Page 6 of 7

Question 7 (16 marks – approximately 29 minutes)

Burger Expert (''BE'') is a fast-food chain store in Hong Kong. The majority of BE's customers
are relatively young. Tom, the CEO of BE, understands that the younger generation is
increasingly concerned about responsible consumerism and, thus, has made establishing
ESG principles one of BE's purchasing considerations. However, to minimise the costs for
implementing ESG initiatives, Tom would like to use the following strategy to roll out EGS
initiatives:

1) Disclose the percentage of energy saved for BE's stores.

2) Obtain accreditation for ISO standards on environmental management.
3) Launch a new artificial meat product to replace beef, as beef is a major source of
carbon emissions.
4) Have six members of BE's board of directors participate in an annual tree planting.

The above initiatives were advertised with good media exposure. However, Catherine,
who is an HKICPA member and the CFO of BE, has realised the following details about
the initiatives:

1) The disclosure on energy saved represents savings from just one of the stores with
the best energy savings achieved and does not cover information from the rest of
the stores.
2) The ISO accreditation covers just one of the subsidiaries of BE in the human
resources office but excludes BE's food processing centre and chain stores.
3) BE did not disclose the revenue of the new meat product, and the product contributes
just 0.5% of BE's total revenue.

Required:

(a) Justify to Catherine whether the above initiatives could be considered

greenwashing by referring to the examples of greenwashing behaviors discussed
in Vollero's 2022 book ''Greenwashing: Foundations and Emerging Research on
Corporate'' and recommend an appropriate approach to address greenwashing
behaviour.
(10 marks)

(b) Advise Catherine, a HKICPA member, on the respective issues and actions in this
situation by referring to the Fundamental Principles and Conceptual Framework
for Professional Accountants in Business under the HKICPA Code of Ethics for
Professional Accountants.
(6 marks)

* * * END OF EXAMINATION PAPER * * *

Module 12 (December 2024 Session) Page 7 of 7