1of6014_CIMA_P3_RM_Topic1_0010NFB Co is a private equity firm
that invests in projects where risk (measured as the standard
deviation) is assessedalongside the expected return in order to
match its risk appetite.Assuming that NFB is risk averse, which TWO
investments from the following list will it
select?InvestmentRiskReturn
P5%10%
Q6%11%
R7%11%
S8%12%
Investment P
Investment Q
Investment R
Investment S
The correct answers are: Investment P Investment QRisk averse
organisations will never choose an investment if it leads toa
higherlevel of risk, unless the higher level ofreturn compensates
for this risk. Although S has a higher level of return than P, its
returns are only 1.5 times the risk; P has returns that are twice
the risk, so would be chosen ahead of S.Although Q and R have the
same return,Q will be chosen because it has lower risk.
2of6014_CIMA_P3_0037X Air, the national carrier of Xland, is
being targeted by an organised and well equipped rebel
organisation. The rebels have released a statement via social media
stating an attack will be carried out on an unspecified X Air
aircraft, and that attacks will continue until the government of
Xland ceases to provide military aid to Zedland.How would you
classify the threat to X Air?Operational only
Strategic only
Operational and Strategic
Neither Operational nor Strategic
The correct answer is: Operational and Strategic.The risk is
operational as it will affect current operating conditions and may
lead to delays due to security precautions. The risk is also
strategic, as even if an attack does not eventuate the publicised
threat could significantly reduce revenue (if customers prefer
other airlines). The impact of a successful attack could,
potentially, be something the airline is unable to recover
from.
3of6014_CIMA_P3_RM_Topic1_0015PL Co wants to invest $20 million
in a new factory that will manufacture a revolutionary new product
but it is concerned that the existing marketmay not be ready for it
yet. The directors have estimated that there is an equal chance
that cash flows could be $4 million per annum, $8 million per annum
or even $12 million per annum and that if the product is to be
given a fair chance, this investment should be given 5 years to
succeed.Assuming that the company also believes there is an equal
chance of the investment making no returns, estimate the net
present value of the proposed investment.The company uses 5% as its
cost of capital and the cumulative discount rate for 5 years is
4.329.Your answer should be expressed in round $'000.$('000)
The correct answer is: 5,974 (to the nearest $'000)If there is
an equal chance of cash-flows being zero, $4 million, $8 million
and $12 million, then we should calculate the expected value using
25% for each option:(0 x 25%) + (4 x 25%) + (8 x 25%) + (12 x 25%)
= $6 millionUsing the 5 year 5% cumulative discount factor means
that the present value of expected cash-flows = 4.329 x 6 = $25.974
millionIf the initial investment is $20 million, this means the
project will deliver a +ve NPV of $5.974 millionTo the nearest
$'000 = 5,974
4of6014_CIMA_P3_RM_Topic1_0018Which of the following statements
is NOT a weakness of sensitivity analysis?Looking at factors in
isolation is unrealistic as they are often interdependent
Sensitivity analysis does not examine the probability that any
variation in costs or revenues might occur
An investment may be one-off, and so 'expected' NPV may never
actually occur
Sensitivity analysis does not provide a decision rule -
parameters defining acceptability must be laid down
The correct answer is: an investment may be one-off, and so
'expected' NPV may never actually occur.This is a weakness of
expected values notsensitivity analysis.
5of6014_CIMA_P3_RM_Topic1_0001B Ltd produces financial
information to monitor its position and performance. Each indicator
is plotted on a quarterly basis to show a profile that the Finance
Director can use to assess the company's risks. The following data
have been extracted from the most recent set of management
accounts:Quarter 1Quarter 2Quarter 3Quarter 4
Receivables days30 days31 days38 days41 days
Gearing ratio51%57%62%69%
Interest cover4.14.03.92.7
For each of the indicators below, suggest an appropriate risk
response for the Finance Director to take from the drop down box.
Each response should be different.Receivables days
Gearing ratio
The correct answers are:Receivables daysTransfer
Gearing ratioReduce
Receivables days are rising suggesting that the company is
unable to collect its debts on time, which is evidently leading to
liquidity issues and increased interest-bearing debt. As interest
cover is an output factor, it should be accepted, as improving
cash-flow will reduce short term interest charges. Both receivables
days and gearing need to be reduced, but as each response needs to
be different, the risk associated with debt collection could be
transferred to a third party factoring agency, allowing the company
to reduce its debt levels (this is an active choice as an increase
in liquid cash could be paid out to shareholders, but the desire to
manage debt levels is favoured here).
6of6014_CIMA_P3_ALQ_S1_0008Which one of the following statements
identifies a valid disadvantage associated with the role of
non-executive directors (NEDS)?NEDs are usually unpaid so lack
focus and application
NEDs tend to consider issues in a different way to executive
directors
NEDs favour the interests of shareholders over the interests of
board members
NEDs often have other commitments and may struggle to dedicate
the time required
The correct answer is: NEDs often have other commitments and may
struggle to dedicate the time required.
7of6014_CIMA_P3_T21GER_BW0001The division of responsibilities at
the head of an organisation is most simply achieved by separating
the roles of the chairman (Chair) and the chief executive officer
(CEO).Classify the following responsibilities as a responsibility
of either the chairman or the chief executive
officer.Responsibility
Facilitate the effective implementation of board decisions
Provide leadership to the board
Ensure effective communication with shareholders
Provide leadership to the business
The correct answers are:Responsibility
Facilitate the effective implementation of board
decisionsCEO
Provide leadership to the boardChair
Ensure effective communication with shareholdersChair
Provide leadership to the businessCEO
8of6014_CIMA_P3_T21GER_BW0008aJessica has recently emigrated
from the UK to live in the Netherlands. Jessica found employment
quickly as Head of Finance for a packaging company, and now sits on
the management board of the company. In addition to the management
board the company has a supervisory board. Jessica finds this board
structure confusing.Are each of the following statements regarding
the roles of the management board and the supervisory board TRUE or
FALSE?The supervisory board has overall responsibility for the
companys governance and strategy
The management board is responsible for the daily running of the
company
The management board should have broad stakeholder
representation including employees and lenders
The correct answers are:The supervisory board has overall
responsibility for the companys governance and strategyTrue
The management board is responsible for the daily running of the
companyTrue
The management board should have broad stakeholder
representation including employees and lendersFalse
Dual board structures exist in some European countries. The
supervisory board has overall responsibility for the company's
governance and deals with strategic issues. The management board is
responsible for the daily running of the company. The supervisory
board should have broad stakeholder representation including
employees and lenders.
9of6014_CIMA_P3_T21GER_BW0026Organisations have a wide range of
stakeholders to consider. One way of classifying stakeholders is by
their proximity to the organisation.Match each of the stakeholder
group names below with the correct stakeholder group
members.StakeholdersStakeholdersStakeholders
EmployeesManagementThe
boardShareholdersCustomersSuppliersLendersGovernmentPressure
groupsMediaCompetitorsTrade union
The correct answers are:StakeholdersStakeholdersStakeholders
EmployeesManagementThe
boardShareholderCustomersSuppliersLendersGovernmentPressure
groupsMediaCompetitorsTrade unions
InternalConnectedExternal
The correct matches reflect the definitions of these stakeholder
types. If you are unfamiliar with the definitions, thinking about
the meaning of each of the three classifications should enable the
correct option to be identified.For example: Employees are clearly
internal, Competitors are clearly eternal.This leaves the final
option as Connected. Connected stakeholders are closer to the
organisation that external stakeholders, but not as close as
internal stakeholders.
10of6014_CIMA_P3_T21GER_BW0030oldSarah works in the finance
department of a management consultancy firm. She is helping prepare
the firms latest integrated report.Under which category of capital
should Sarah include information relating to a recently established
co-operation agreement between the consultancy and a respected
university to provide internships for their top 5 MBA
students?Social
Financial
Natural
Intellectual
The correct answer is: Social.The relationship with the
university would be categorised as social capital. It represents an
opportunity to enhance the organisations human capital in the
future, if over time interns provide a source of high quality
recruits.
11of6014_CIMA_P3_02_CO_0267Which of the following is least
likely to have an interest in an organisation's IT
strategy?Customers.
Shareholders and potential investors.
Employees, both current and potential.
Competitors.
The correct answer is: Customers.As long as their needs are met
and they receive good service, customers will be uninterested in
how this is achieved.Employees, both current and potential, will be
interested in the IT strategy as it indicates the degree of
importance attached to IT. Shareholders will be interested in the
profit potential of the IT strategy. Competitors will be interested
to see if the IT strategy is providing competitive advantage.
12of6014_CIMA_P3_T31IS_BW0009An organisations information
function (encompassing information systems and IT) may be
centralised or decentralised.Which one of the following is an
advantage of a decentralised approach?Improved goal congruence
between the goals of divisional managers and the goals of the
organisation
Rapid management response to environmental changes
Easier to measure performance objectively
Improved communication of information between the groups
managers
The correct answer is: Rapid management response to
environmental changes.Achieving goal congruence is often more
difficult under a decentralised approach.One of the advantages of
decentralisation is the opportunity for a speedier response to
problems and situations as a result of divisional managers more
detailed knowledge.There are often difficulties in setting suitable
measures of performance in decentralised
organisations.Communication between divisional managers is more
difficult under a decentralised approach.
13of6014_CIMA_P3_T31IS_BW0005Information systems and information
technology can create competitive advantage.Which of the following
would NOT create a competitive advantage?Forging better links with
customers and suppliers
A more efficient production process based on a new
technology
A new email system, 30% quicker than rival systems
A new data analysis tool that uncovered trends in customer
data
The correct answer is:A new email system, 30% quicker than rival
systemsCompetitive advantage refers to anything that puts an
organisation in a better position than competitors and helps
achieve the organisations objectives. Competitive advantage is
gained by offering greater value, either through lower prices or by
providing benefits that more than justify the price level.Forging
better links with customers and suppliers would provide
efficiencies that could create competitive advantage. If
competitors gain the same technology, the competitive advantage
would disappear.A more efficient production process would enable
the business to offer greater value.Data analysis tools can create
competitive advantage, for example through providing insights as to
what product features certain market segments or niches value.A
new, quicker email system would not create competitive advantage as
the speed of standard email communication is almost instantaneous
(unless large files are attached, in which case a different
technology should be used).
14of6014_CIMA_P3_T31IS_BW0006Which one of the following is NOT
an opportunity that was created through developments in information
technology?The ability to sell goods worldwide
Selling accessories for smart phones via a market stall
Creating a virtual team
Producing ebooks
The correct answer is: The ability to sell goods worldwide.This
question emphasises the need to read all questions carefully and to
consider all options rather than jumping to a conclusion.The
ability to sell goods worldwide was not created by developments in
information technology. Companies have exported goods worldwide for
over a century. Developments in technology, such as the internet
and ecommerce, have made it easier to sell goods worldwide but IT
did not create the opportunity.If smart phone technology had not
been developed, there would not be any smart phone accessories to
sell.Virtual teams would not be possible without the internet and
related technologies.Books have existed for centuries, but the
opportunity to produce ebooks (the ePub file or similar) was
created by developments in IT.
15of6014_CIMA_P3_T31IS_BW0008Luke is Managing Director at
HotStuff Ltd, a chain of coffee houses. Luke monitors the business
using a dashboard of key measures that track high-level
performance.What type of information system is Lukes dashboard?An
expert system
An Executive Information System (EIS)
Office Automation System (OAS)
Enterprise Resource Planning (ERP)
The correct answer is:An Executive Information System (EIS)Lukes
dashboard is an Executive Information System (EIS), sometimes
referred to as an Executive Support System (ESS). A typical EIS
provides senior management with a limited number of key measures to
monitor the high-level performance of the business using a few
measures.An expert system uses a database of knowledge combined
with programmed rules to make decisions.The term Office Automation
System (OAS) refers to general purpose software generally utilised
in office environments, for example Word Processing and Spreadsheet
software.The term Enterprise Resource Planning (ERP) is used to
describe systems which integrate the data and processes of an
entire organisation into a unified system.
16of6014_CIMA_P3_04_MAH_0642An investor buys a call option on
XYZ shares, with an exercise price of 500p. The option was brought
for a premium of 20p.If the price on expiry of the option is 580p,
what is the gain or loss made by the investor just on the option
itself?20p loss.
100p gain.
80p gain.
60p gain.
The correct answer is: 60p gain.The call option will be
exercised, giving a profit of (580 - 500)p = 80p, but after
deducting the cost of the premium, the net gain for the investor is
60p.
17of6014_CIMA_P3_12_MAH_0022Leo expects to receive 500,000 from
daily trading. Possible gains or losses are normally distributed
around a mean of 0 and a daily standard deviation of 7,000. The
normal value associated with 99% is 2.33.What is the weekly value
at risk at 1% to the nearest 100?
The correct answer is: 36,5007,000 x//sqrt5=15,652, the weekly
standard deviation
Value at risk=15,652 x 2.33
=36,469
=36,500 to nearest 100
18of6014_CIMA_P3_11_MAH_0001Which of the following are examples
of the foreign exchange economic risks that a company might face?A
strengthening of the currency in which the company pays its
principal supplier
A major overseas customer demanding a longer credit period to
settle invoices
A fall in the home currency value of a non-current asset held
overseas, due to a weakening of the overseas country's exchange
rate
Currency movements forcing the company to change the selling
prices of its exports to remain competitive
The correct answers are: Currency movements forcing the company
to change the selling prices of its exports to remain competitive.
A strengthening of the currency in which the company pays its
principal supplier.These are both risks that impact on the markets
in which companies participate.A fall in the home currency value of
the overseas non-current asset is a translation risk, if the
company has no intention of selling that asset. A major overseas
customer demanding a longer credit period is an example of
increased credit risk and increased transaction risk.
19of6014_CIMA_P3_01_MAH_0452Beta Ltd is a UK company trading
wholly but is a subsidiary of Mann Gmbh, a German company. It is
group policy that all invoices are issued in Euros.Which of the
following is a disadvantage of such a policy?Prices are transparent
throughout the group.
Beta's customers now settle their bills with a UK company in
Euros.
Accounts consolidation will all be in Euros.
Trade between group companies is all in Euros.
The correct answer is: Beta's customers now settle their bills
with a UK company in Euros.The idea of a single currency is to
overcome the problems of operating in many different currencies.
Intergroup trade, pricing and accounts preparation in one currency
are all examples of the suggested benefits of a single currency. UK
customers dealing with a UK company, Beta, in Euros exposes them to
an exchange rate risk that they had not experienced when Beta
invoiced in sterling.
20of6014_CIMA_P3_FR_Topic4_0010VMH is a high street retailer of
entertainment products. In recent months, it has suffered from
declining sales due to online competition and increasing costs
including rent andutilities (gas andelectricity). It has seen its
payables days rise steadily over this period and is close to its
overdraft limit with the bank.What kind of risk does VMH appear to
be experiencing?Liquidity risk
Insolvency risk
Gearing risk
Credit risk
The correct answer is: Liquidity riskThis stems from an
inability to meet short term cash-flow demands. Without access to
liquidity, VMH may start to see its going concern status
questioned.
21of6014_CIMA_P3_04_MAH_0657In the Black-Scholes model for
calculating the value of an option, there are several variables
influencing the option price.With which of the following factors
does the price of a call option vary, so that the option price will
increase as the value of the factor rises?Select ALL that
applyVolatility in the price of the underlying item.
The current price of the underlying item.
The exercise price of the option.
The time to expiry of the option.
The correct answers are: Volatility in the price of the
underlying item; The current price of the underlying item; The time
to expiry of the option.The value of the option will fall as the
exercise price of the option increases.
22of6014_CIMA_P3_04_MAH_0671A company can borrow at a fixed rate
by issuing five-year bonds at 9.4% or can borrow at a variable rate
of LIBOR + 60 basis points. It has been quoted rates of 8.50% -
8.55% for a five-year plain vanilla swap. The company wants to
borrow at a floating rate of interest.How much would it save by
borrowing fixed and arranging a swap, compared with borrowing at a
floating rate?0.15%
0.30%
0.90%
It would be cheaper to borrow at a floating rate.
The correct answer is: It would be cheaper to borrow at a
floating rate.In the swap, the bank would pay the fixed rate and
receive the floating (LIBOR). It will therefore quote the lower of
the two rates, the bid rate of 8.50%. The company would pay LIBOR
in the swap and receive 8.50% fixed. It would also pay 9.40% by
issuing bonds. This gives a net effective cost of LIBOR + (9.40 -
8.50)% = LIBOR + 0.90%. If it borrowed at a floating rate, it would
pay LIBOR plus 0.60%. It would therefore be cheaper to borrow at a
floating rate.
23of6014_CIMA_P3_IR_Topic5_0011Which of the following statements
about forward rate agreements (FRAs) are most likely to describe
the disadvantages of using them?Protection from adverse interest
rate movements
Flexibility of arrangement
They are a legally binding contract
They operate for a fixed period of time
The correct answers are: They are a legally binding contract
They operate for a fixed period of timeAll four options could be
advantages - protection afforded from adverse movements in interest
rates and flexibility of arrangement are obvious advantages, and
being able to rely on a contract for a fixed period of time can
also be an advantage too.However,contracts work both ways and may
"lock" a company into a FRA that it no longer wants (especially if
rates move against them) plus the fixed term nature of the FRA mean
that they do not last indefinitely.Both protection and flexibility
could only be advantages, so contracts and fixed periods are the
correct answer here.
24of6014_CIMA_P3_01_MAH_0454A company wants to secure minimum
earnings on deposits of $10 million it will be making in four
months' time (mid-December) for an investment period of three
months (to mid-March).Which of the following would be suitable
methods of hedging the exposure to a fall in interest rates over
the next four months?Select ALL that applySelling a 5 v 9 FRA.
Buying a call option on December short dollar futures.
Selling September short dollar futures.
Buying December short dollar futures.
Buying a put option on September short dollar futures.
The correct answers are: Buying a call option on December short
dollar futures. Buying December short dollar futures.The exposure
to a fall in short-term interest rates can be obtained by selling a
4 v 7 FRA, buying December futures or buying a call option on
December futures. Dealing in September futures or options does not
provide sufficient cover against the interest rate exposure.
25of6014_CIMA_P3_01_MAH_0664The treasurer of a UK-based
multinational expects to deposit about 30 million in cash in May
for a number of months, and is worried that short-term interest
rates on the euro will soon fall. It is now December.Which of the
following would be an appropriate hedging transaction with
futures?Buy March euribor futures.
Buy June euribor futures.
Sell March euribor futures.
Sell June euribor futures.
The correct answer is: Buy June euribor futures.An exposure to a
decrease in short-term interest rates can be hedged by purchasing
short-term interest rate futures. June futures are more appropriate
than March futures because with March futures, there will be an
exposure to a fall in the interest rate after the contract expires
in March and before the deposit of cash is made in May. The company
will close its position in May by selling euribor futures.
26of6014_CIMA_P3_01_MAH_1889Suppose that annual inflation levels
are currently at 4% in Japan and 6% in the United Kingdom.If the
levels of inflation move during the next year to 3% in Japan and 8%
in the United Kingdom, what effect are these changes in inflation
likely to have on the relative value of the yen and the pound by
the end of next year, according to the purchasing power parity
theory of long term exchange rates?Sterling will decline in value
against the yen by:3.0%
5.0%
4.6%
2.8%
The correct answer is: 4.6%According to purchasing power parity
theory, the exchange rate will change according to the relative
rates of inflation in each country next year.Sterling's value
against the yen will fall, as a percentage of its current level, to
100% (1.03/1.08) = 95.4%This is a fall of 4.6% in value. To prevent
such a fall, the UK authorities might need to raise sterling
interest rates, in order to attract more investors into buying
sterling securities (investing in the UK).
27of6014_CIMA_P3_11_MAH_0006Which of the following methods of
predicting the exchange rate in a year's time is likely to give the
most accurate prediction?Predicting the exchange rate on the basis
of predicted differences in inflation rates.
Predicting the exchange rate on the basis of the expected prices
charged in a year's time for the same product in the two different
currencies.
Using the current one year forward rate.
Predicting the exchange rate on the basis of current differences
in one year deposit interest rates.
The correct answer is: Predicting the exchange rate on the basis
of current differences in one year deposit interest rates.The
forward rate is based on a prediction that may be unreliable. This
prediction will generally be based on interest rates, but the
forward rate may be different in the short-term from the rate
determined by using differences in interest rates.Inflation rate
forecasts may well be less reliable than forecasts for interest
rates.The pricing of the product may not only be determined by the
exchange rate, but by other factors such as transport costs.
28of6014_CIMA_P3_12_MAH_0028A UK company is due to receive
5,000,000 from a German customer in four months' time and is
seeking to hedge this amount by using a money market hedge. The
current investing rate in the Eurozone is 1.5% and the current
borrowing rate is 2.7%.How much in will the UK subsidiary need to
borrow now to be able to hedge this receipt?4,975,124
4,955,401
4,868,549
4,926,108
The correct answer is: 4,955,401The UK company will need to
borrow euros in the Eurozone and pay 2.7%/3 = 0.9% interest over
the four months.Amount to be borrowed = 5,000,000/1.009 =
4,955,401The UK company will settle the loan by the receipt from
its customer and will put the amount it has borrowed on deposit in
the UK.
29of6014_CIMA_P3_01_MAH_1877The treasurer of Beech Cowishes to
sell 120,000 euros that the company will receive in two months'
time from a customer in Frankfurt. The bank's exchange rates
are:Spot rate (X$ to )2.73 2.74
2 months forward rate0.0325 to 0.03000
If the company took out a forward exchange contract, what would
it receive in 2 months' time from the exchange of its euro
income?$43,321.30
$43,360.43
$44,568.25
$44,280.44
The correct answer is: $44,280.44The company is selling euros,
and so the bank is buying. Forward rates are at a premium to spot
rates, and premiums should be deducted.Euros
Spot rate2.74
2 months forward premium0.03
2 months forward rate2.71
Income to the company = 120,000 euros / 2.71 = $44,280.44
30of6014_CIMA_P3_04_MAH_0644A eurodollar bank account yields 6%
per annum. A company places 200,000 on deposit for three months at
an exchange rate of 1 = $1.53, and sells the proceeds forward for
that period at $1.50.What is the return on investment for the
three-month period?7.25%.
3.53%.
1.53%.
1.5%.
The correct answer is: 3.53%.Place on deposit $306,000 (200,000
1.53).Interest for three months = $306,000 6% 3/12 = $4,590Sell
forward ($306,000 + 4,590) at $1.50, to earn 207,060 for three
months. This gives a return of about 7,060/200,000, 3.53 % for the
period.
31of6014_CIMA_P3_04_MAH_0592Harvey Ltd is considering a project
costing 200,000, financed half by debt and half by equity. The
project would leave Harvey's gearing unchanged. The pre interest
and tax cash flows from the project would be 75,000 a year in
perpetuity.The cost of equity of an equivalent ungeared company is
12%.Tax is 30%.Using the adjusted present value method, calculate
the net present value of the project.
The correct answer is 267,500Using the M&M formula: Vg = Vu
+ TBcVu = pre-tax cash-flows = 75,000 less tax @30% =
52,500Discounted at 12% in perpetuity = 52,500 / 0.12 = 437,500Less
initial investment of 200,000 = 237,500TBc (value of debt x
corporate tax rate) = (50% of 200,000) x 30% = 30,000Vg = 237,500 +
30,000 = 267,500
32of6014_CIMA_P3_04_MAH_0575General Herbage Ltd has appraised
three capital investment projects, and has produced the following
analysis.ProjectCapitaloutlayPV ofnet cashflowsNPV
ofprojectProfitabilityindex
000000000
Alpha4801,0505702.19
Beta6001,2006002.00
Gamma8001,6508502.06
Given that capital available is restricted to 1,120,000, what
investments would maximize the total NPV, assuming that all three
projects are indivisible?Projects Beta and Gamma
Project Gamma
Projects Alpha and Beta
Projects Alpha and Gamma
The correct answer is: Projects Alpha and Beta.ProjectsCapital
requiredCombined NPV
000000
Alpha and Beta600 + 480 = 1,080570 + 600 = 1,170
Alpha and Gamma480 + 800 = 1,280; too much-
Beta and Gamma600 + 800 = 1,400; too much-
Gamma800850
If the projects had been divisible, then General Herbage would
have invested the maximum outlay in Alpha, as Alpha has the highest
profitability index, and then invested the rest in part of Gamma,
as that has the next highest profitability index.
33of6014_CIMA_P3_INV_T7_0018BF Ltd is considering an investment
and wishes to know if it has any way of calculating the likely
benefits beyond those produced by an NPV analysis. One way of
assessing an investmemt is to consider whether any real options
exist.From the drop own box, select the most appropriate form of
real option that is being described below:The company is
considering the acquisition of a large piece of land in a
tropicalcoastal location where it believes there may be valuable
mineral deposits. It has never mined before and there is some doubt
whether this activity will be successful. Preliminary
investigations of this land previously identified several nearby
locations popular with tourists: demand is expected to rise in this
tropical location.
The correct answer is: The option to abandon.The option to
abandon the mining operation and sell the land for tourism purposes
appears an attractive way out of the possible risks from mineral
extraction, so has value as an option to the company.The option to
wait would be relevant only if the company decided not to start
mining, which would be expensive and would still require a decision
on whether to proceed or not.There could be a follow-on option if
the company was keen to use its experience in subsequent mining
operations, but as this is new, it may only have limited value when
compared with the abandonment option.
34of6014_CIMA_P3_INV_T7_0012Which of the following is a
disadvantage of using the certainty equivalent method during
capital investment appraisal?Amounts are adjusted to reflect
risk
Cash-flows are discounted by the risk-free rate
Discounts are estimated by management
Risk-free rates are complex to calculate
The correct answer is: Discounts are estimated by management.The
correct disadvantage is that discounts are estimated by management,
which makes them subjective and prone to error.
35of6014_CIMA_P3_02_CO_0540Which three of the following are
associated with the outcome of a successful project?It is completed
later than agreed but under budget
It is completed without exceeding authorised expenditure
The end result conforms to the specification and exceeds
expenditure
The result is ready for use on the agreed date and conforms to
specification
It is completed on time and within budget
The correct answers are: It is completed without exceeding
authorised expenditure The result is ready for use on the agreed
date and conforms to specification It is completed on time and
within budgetA project will be deemed successful if it completed at
the specified level of quality, on time and within budget. All
three of these factors must be present and it is not sufficient for
a project to be successful in two out of three - even if it excels
in one of its outcomes.
36of6014_CIMA_P3_T81IC_BW0017Heather is manager of a small
factory that produces curtains. The factory is one of a number of
similar factories owned by the same company. Each factory is a
profit centre.Over which of the following would Heather have
control?I. Selling pricesII. Controllable costsIII. Apportioned
head office costsIV. Capital investment in the centreI and II
only
I, II and III only
I, II and IV only
I, II, III and IV
The correct answer is: I and II only.The manager of a profit
centre has control over how revenue is raised, ie selling prices
(item I) and over the controllable costs incurred in the centre
(item II).Costs apportioned by head office will reduce profit, but
they are not under Heathers control.Profit centre managers do not
have control over capital investment.
37of6014_CIMA_P3_T81IC_BW0014Which of the following represent
key areas of control of the sales system?Select ALL that
applyConfidentiality
Authorisation
Custody
Recording
Payment
The correct answers are: Authorisation Custody RecordingControls
of the sales system will be based around: Selling (authorisation)
Good outwards (custody) Accounting (recording)Confidentiality is
important, particularly as customer data held may fall under data
protection legislation, but confidentiality is a relatively narrow
concept and is not considered a key area of control for the sales
system.Ensuring payment is received for sales made is essential if
a business will survive. This would form part of the recording
(accounting) area of controls.
38of6014_CIMA_P3_T81IC_BW0016Z Co is a business which deals with
highly sensitive information. Z Co is considering the effectiveness
of the password system used on the Z Co computer network.Which of
the following will increase password effectiveness?Select ALL that
apply.Displaying the password on screen
Passwords given to users rather than users selecting their
password
Increasing the number of failed password attempts permitted
before locking the user
Staff given a formal warning if passwords are revealed
Frequent changes of password
The correct answers are: Passwords given to users rather than
users selecting their password Staff given a formal warning if
passwords are revealed Frequent changes of passwordDisplaying the
password on screen would increase the chances of the password being
compromised.If staff are given passwords rather than choosing their
own, this reduces the chances of someone else guessing passwords
based on common passwords such as childrens names.Increasing the
number of failed password attempts allowed increases the risk of
hacking.An automatic formal warning for revealing a password will
deter password sharing.Frequent changes of password reduce the risk
of passwords being compromised and reduces the opportunity to use
compromised passwords.
39of6014_CIMA_P3_04_iAU_0111Which of the following controls
should be least effective in ensuring that the research and
development function's time is not wasted on projects that will
provide no benefit for the organisation?The board deciding on and
monitoring research and development strategy.
Action being taken as a result of post implementation reviews of
projects.
Research and development following a common project
methodology.
Research and development staff documenting their findings.
The correct answer is: Research and development staff
documenting their findings.This should ensure time is not wasted
because data has been lost but does not guarantee that the work
being done is worthwhile.The board should hopefully be able to
exercise informed judgements whilst post implementation reviews
should highlight problems that can be corrected in the future. A
well-defined methodology should ensure that risks of going off the
wrong track are minimised.
40of6014_CIMA_P3_08_CO_0007Which TWOof the following are
examples of contingency planning controls for IT systems?Standby
procedures with another company
Health and safety training for staff.
Recovery of affected data
Fire detector systems
The correct answers are: Standby procedures with another
company. Recovery of affected data.The primary purpose of health
and safety training should be to prevent problems occurring in the
first place. Fire detector systems should detect a problem but they
cannot deal with any problems that the fire detected has
caused.
41of6014_CIMA_P3_T81IA_BW0003The internal audit report should
include which of the following?Select ALL that apply.The
qualifications of the internal auditor
The risks of current practice
The controls in place
Control weaknesses or lack of application of controls
The causes of internal control weaknesses
The impact of internal control weaknesses
Recommendations to solve internal control weaknesses
A detailed analysis of the costs of implementing the reports
recommendations
The correct answers are: The risks of current practice The
controls in place Control weaknesses or lack of application of
controls The causes of internal control weaknesses The impact of
internal control weaknesses Recommendations to solve internal
control weaknessesUnlike external audit, there are no prescribed,
formal requirements for internal audit reports.Areas an effective
internal audit report should cover include the six items identified
as correct. Risks, controls, control weaknesses (including causes
and impact) and recommendations are essential areas that should be
covered in internal audit reports.There is no need or benefit to
including the qualifications of the internal auditor.A detailed
analysis of the costs of implementing the reports recommendations
would be beyond the scope of the report.
42of6014_CIMA_P3_01_iAU_0154The two principal forms ofcomputer
assisted audit techniques (CAATs) are test data and audit
software.In respect of which of the following audit activities
would the use of test data be most relevant?Performing analytical
procedures on the financial statements.
Testing programmed controls over sales invoicing.
Selecting and extracting a sample for a confirmation of trade
receivables.
Verifying aged receivables balances.
The correct answer is: Testing programmed controls over sales
invoicing.In general, test data is used for transaction testing not
balance testing. It is particularly appropriate for testing of
programmed application controls. In order to test the correct
operation of a control or calculation the auditor creates his own
input which is processed through the client's system. The output is
compared with the expected result. The test data is normally
processed with the client's own data under normal 'live' running
conditions.Audit software can be used for balance and transaction
testing but it is particularly appropriate during substantive
testing, including analytical procedures. Other options are
substantive procedures and appropriate interrogation software might
be employed by the auditor to assist with these tests.
43of6014_CIMA_P3_ALQ_S5_0016Debbie has recently been transferred
from the finance department to the internal audit department,
becoming Head of Internal Audit.Debbie wants to establish the
current level of performance being achieved by the department.Which
areas should Debbie focus on?Select ALL that applyExternal
relationships
Independence
Skills and knowledge
Authority
Effective management
Social responsibility
The correct answers are: Independence Skills and knowledge
Authority Effective management
44of6014_CIMA_P3_01_iAU_0134Dandy Co, a large road haulage
company, has an internal audit department.Which of the following
activities might the internal auditors be involved in?Supervising
the setting up of a new driver and cargo tracking system.
Making changes to improve the operational effectiveness of
collection and delivery systems.
Re-programming the purchase ledger software.
Reviewing the structural and operational adequacy of the payroll
system.
Taking part in senior management performance development
reviews.
The correct answer is: Reviewing the structural and operational
adequacy of the payroll system.Internal audit is a review and
monitoring function. Any activity that constitutes direct
involvement in the running of the business, such as 'supervising',
or 'making changes to' is not therefore appropriate for internal
auditors. Re-programming the purchase ledger software is clearly an
operational matter as is taking part in senior management
performance development reviews.
45of6014_CIMA_P3_01_iAU_0349The gross profit percentage for a
manufacturing company has risen from 5% to 7% and the net profit
percentage has fallen from 0.5% to 0.3%.Which of the following
explanations may have caused this change?More efficient procedures
have been put into place causing a fall in direct labour costs and
administrative overheads have risen.
The cost of raw materials has fallen and non-manufacturing wages
and salaries have increased.
The cost of energy for manufacturing has risen and the cost of
raw material has risen.
Administrative overheads have fallen and the depreciation on
assets used in manufacturing has increased.
The sales volume has increased and the costs of raw materials
has risen.
The correct answers are: More efficient procedures have been put
in place causing a fall in direct labour costs and administrative
overheads have risen. The cost of raw materials has fallen and
non-manufacturing wages and salaries have increased.If more
efficient procedures have been put into place causing a fall in
direct labour costs, or the cost of raw materials has fallen, the
gross profit percentage will rise.If administrative overheads or
non-manufacturing wages and salaries have risen, the net profit
percentage will fall.If the cost of energy for manufacturing, the
cost of raw materials or the depreciation on assets used in
manufacturing have risen, the gross profit percentage will fall.If
administrative overheads have fallen, the net profit percentage
will rise.An increase in sales volume does not have any effect on
the gross or net profit percentages unless discounts have been
given.
46of6014_CIMA_P3_T81MAC_BW0019The Online Bank provides banking
services over the internet. One of the banks monthly Key
Performance Indicators is the website usability rating obtained
from client feedback surveys.How would this KPI be classified under
Kaplan & Nortons Balanced Scorecard?Financial
Customer
Internal business
Innovation and learning
The correct answer is: Customer.For this organisation, website
usability is a key component of the service they provide to
customers. Client feedback related to website usability should
therefore be classified as Customer under Kaplan & Nortons
Balanced Scorecard.
47of6014_CIMA_P3_T81MAC_BW0024Which THREE of the following are
features of TQM?Widespread inspection of output
A commitment to getting things right first time
Stated acceptable levels of defects
A customer focus
Quality certification programmes
Supplier selection based solely on price
The correct answers are: A commitment to getting things right
first time' A customer focus Quality certification programmesUnder
TQM, there is a commitment to getting things right first time.
Quality is built-in, making widespread inspection unnecessary. The
aim is zero defects. TQM programmes emphasise the importance of a
customer-focus and of quality certification. The emphasis on
quality means supplier selection would be influenced heavily by the
quality of goods or services the supplier provides.
48of6014_CIMA_P3_T81MAC_BW0010A Just-in-time approach to
operations involves which one of the following?Increased inventory
levels to reduce stock-outs
Large production runs to enable economies of scale
Demand pulling production through the production system
Supply pushing production through the production system
The correct answer is: Demand pulling production through the
production systemJust-in-time is an approach that includes minimal
or zero stock holdings. Customer demand triggers production and
pulls it through the production system for on-time delivery.
49of6014_CIMA_P3_T81MAC_BW0014Peach Computers produce
high-quality innovative computers, laptops, tablets and mobile
phones. To preserve their position as market leader, Peach need to
constantly innovate and release new products. Peach invest heavily
in research and development and have done so for many years. Their
products are seen as the market leader, and, based on sales
revenue, Peach is the largest global company of its type. Although
revenue growth is strong, Peach has experienced falling
profitability over the past three years.Which one of the following
would explain the decline in profitability at Peach?Over estimating
the life-cycle of their products
Pricing products too high
Failing to match the technical features of competitors
Under-estimating the life-cycle of their products
The correct answer is: Over estimating the life-cycle of their
products.The key point from the scenario is the heavy investment,
over many years, in research and development. This investment is
written-off over time, impacting profitability.It seems that Peach
has over-estimated the life cycle of its products, and as a
consequence has not priced them high enough to produce a return
before the products are replaced with a newer model.Whether demand
would hold-up at higher price levels is unknown.
50of6014_CIMA_P3_09_MAH_1023Which of the following is least
likely to be a problem with post-completion audits?The strategic
effects of a project may take years to materialise and it may not
be possible to quantify them effectively
It is a costly and time-consuming exercise
Managers are likely to be become over-confident and more likely
to take risks
There may be little to gain by identifying variances which arise
as a result of uncontrollable factors
The correct answer is: Managers are likely to be become
over-confident and more likely to take risks.Applied punitively,
post-completion audits may lead to managers becoming over cautious
and unnecessarily risk averse.
51of6014_CIMA_P3_04_MAH_0613Installing devices such as fire
extinguishers and burglar alarms is an example of:Risk
avoidance.
Risk retention.
Risk transfer.
Risk reduction.
The correct answer is: Risk reduction.These measures won't lead
to risk being avoided (they might not work properly).
52of6014_CIMA_P3_T21GER_BW0014Joe is considering investing in an
investment bank, InvestBank plc. Joe has obtained the latest annual
report of InvestBank. He is particularly interested in the banks
approach to risk management.Which one of the following pieces of
information will Joe NOT find in InvestBanks annual report?An
assessment of the probability and significance of key risks.
A copy of the risk register.
The key risks identified by InvestBank.
InvestBanks proposed responses to key risks.
The correct answer is: A copy of the risk register.The risk
register is an internal document. A copy of the risk register would
not be included in the annual report.
53of6014_CIMA_P3_T31IS_BW0012Complete the statement using one of
the words below. volume velocity variety veracityThe speed of data
creation is exponentially greater than it was even just a few years
ago. An organisation needs to process data within a reasonable time
frame. This statement describes the Big Data characteristic of.
The correct answer is:The speed of data creation is
exponentially greater than it was even just a few years ago. An
organisation needs to process data within a reasonable time frame.
This statement describes the Big Data characteristic ofvelocity.The
volume of data generated is a key feature of 'Big Data'. The
quantity of data now being produced is being driven by social media
and transactional-based data sets recorded by large organisations,
for example data captured from in-store loyalty cards and till
receipts.Variety refers to different data types. Modern data takes
many different forms. Structured data follows a defined file and
field structure, whereas un-structured data may be in the format of
email or video.Veracity is sometimes referred to as the fourth V.
It refers to uncertainty regarding what data will be produced.
54of6014_CIMA_P3_FR_Topic4_0013A company decides to address
rising wage costs in its own factories by relocating production to
a nearby country with high levels of unemployment and cheaper
premises costs.After 12 months of activity overseas, it discovers
that its labour costs are higher than forecast, even taking into
account the planned effects of the transition from domestic to
overseas production. The reasons for these extra costs appear to be
the following: employees based overseas are disinclined to work
through problems unsupervised and so overtime payments have risen
significantly;and the local attitude towards punctuality differs
considerably from domestic levels, leading to extra labour hours
being paid in order to meet customer demand.What is the risk
experienced in this situation called?Geographical risk
Political risk
Cultural risk
Human resource risk
The correct answer is: Cultural riskCultural risk is caused by
different laws, customs and languages adversely affecting normal
operations. In this example, the different workplace culture
overseas has adversely affected the company's manufacturing.
55of6014_CIMA_P3_04_MAH_0674A company has arranged to invest at
LIBOR minus 50 basis points. It has also arranged an interest rate
collar that fixes a maximum effective interest received for the
company of 8.5% and a minimum effective interest received of
7.5%.What does the collar consist of?With the collar, the company
has bought a series of consecutive interest rate call options at a
strike price of 8% and sold a matching series of put options at
9%.
With the collar, the company has bought a series of consecutive
interest rate call options at a strike price of 8% and bought a
matching series of put options at 9%.
With the collar, the company has bought a series of consecutive
interest rate call options at a strike price of 9% and sold a
matching series of put options at 9%.
With the collar, the company has bought a series of consecutive
interest rate call options at a strike price of 9% and bought a
matching series of put options at 9%.
The correct answer is: With the collar, the company has bought a
series of consecutive interest rate call options at a strike price
of 8% and sold a matching series of put options at 9%.A collar in
effect is a series of matching call and put options. The company
buys a series of call options, each with a strike rate of 8%, which
fixes the minimum it can receive at 7.50% (since the company
invests at LIBOR minus 0.50%). For each call option, the company
sells a put option, which reduces the net premium payable. The put
options set a limit of 9% to LIBOR, so that the net income for the
company will not rise above 8.50%.
56of6014_CIMA_P3_04_MAH_0654If you were to sell a put option
priced at 100 for a premium of 12, what would your maximum possible
profit be on the whole position?100
88
12
Unlimited
The correct answer is: 12.The option would only be exercised if
the price went below 100, which would cost you more to buy and
would eat into your profit. If the price rose above 100, the option
would lapse and the most you would make is the premium of 12.
57of6014_CIMA_P3_04_MAH_0593Kitten Ltd is about to start a
project lasting four years, one effect of which will be to increase
its borrowing capacity by 4 million, at the risk-free rate of
return of 5%.Tax is payable at 30% one year in arrears.Calculate
the impact of the increased borrowing capacity on the adjusted
present value calculation, to the nearest 000.
The correct answer is: 203,000.PV of tax shield = 4 m 5% 0.3
(4.329 0.952) = 202,620
58of6014_CIMA_P3_04_iAU_0103Which of the following controls
would be least effective as a control ensuring that goods and
services that the organisation requires are ordered from
appropriate suppliers?Central policy for the choice of
suppliers.
Order forms being prepared only when a pre-numbered purchase
requisition has been received.
Keeping blank order forms in secure accommodation.
Monitoring of the terms offered by suppliers.
The correct answer is: Monitoring of the terms offered by
suppliers.Monitoring suppliers' terms is primarily designed to
ensure that orders are made at competitive prices.
59of6014_CIMA_P3_01_iAU_0013AWhich of the following best
describes a 'value for money' audit?An audit of the economy,
efficiency and effectiveness of a department, function or other
business unit.
The audit of the treasury function within government
departments.
The audit of payroll software in the private sector.
The audit of the environmental, economic and sustainability
policies and procedures of a company.
The correct answer is: An audit of the economy, efficiency and
effectiveness of a department, function or other business unit.An
audit of the economy, efficiency and effectiveness of a department,
function or other business unit (often in the public sector), is
the best description of a value for money audit. Such audits are
now commonly conducted in the public sector.
60of6014_CIMA_P3_T81MAC_BW0009Some multi-national organisations
have utilised complex corporate structures and contrived transfer
pricing arrangements to reduce their overall tax liabilities. Under
this approach, transfer prices are set with the aim of supressing
profits in countries that have higher rates of corporate tax.What
is the most significant risk associated with this approach?Being
perceived as unethical and a poor corporate citizen
Miscalculating and failing to minimise tax
Basing commercial decisionson distorted financial results
A whistleblower revealing the scheme to the media
The correct answer is: Being perceived as unethical and a poor
corporate citizenAn organisation that is perceived as unethical and
a poor corporate citizen is likely to experience a significant
backlash from customers. The expectations of society as a whole
regarding the conduct of large organisations have risen over recent
decades. More recently, the growth of social media has made the
organisation of campaigns and boycotts far easier than in the
past.