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.