BPP P3 Step 6 Answers

1 of 60
14_CIMA_P3_RM_Topic1_0010
NFB Co is a private equity firm that invests in projects where risk (measured as the
standard deviation) is assessed alongside 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?
Investment
P
Q
R
S
Risk
5%
6%
7%
8%
Return
10%
11%
11%
12%
Investment P
Investment Q
Investment R
Investment S
The correct answers are:
Investment P
Investment Q
Risk averse organisations will never choose an investment if it leads to a higher level
of risk, unless the higher level of return 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.
2 of 60
14_CIMA_P3_0037
X 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.
3 of 60
PL Co wants to invest $20 million in a new factory that will manufacture a

revolutionary new product but it is concerned that the existing market may 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 million
Using the 5 year 5% cumulative discount factor means that the present value of
expected cash-flows = 4.329 x 6 = $25.974 million
If the initial investment is $20 million, this means the project will deliver a +ve NPV of
$5.974 million
To the nearest $'000 = 5,974
4 of 60
Which 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 not sensitivity analysis.

5 of 60
B 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:
Receivables days
Gearing ratio
Interest cover
Quarter 1
Quarter 2
Quarter 3
Quarter 4
30 days
51%
4.1
31 days
57%
4.0
38 days
62%
3.9
41 days
69%
2.7
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
Receivables days
Gearing ratio
Transfer
Reduce
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 interestbearing 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).
6 of 60
14_CIMA_P3_ALQ_S1_0008
Which 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.
7 of 60
14_CIMA_P3_T21GER_BW0001
The 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

Responsibility
Facilitate the effective implementation of board decisions
Provide leadership to the board
Ensure effective communication with shareholders
Provide leadership to the business
CEO
Chair
Chair
CEO
8 of 60
14_CIMA_P3_T21GER_BW0008a
Jessica 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 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
True
True
False
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.
9 of 60
Organisations 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.
Stakeholders
Employees
Management
The board
Stakeholders
Shareholders
Customers
Suppliers
Stakeholders
Government
Pressure groups
Media
Lenders
Competitors
Trade union
Stakeholders
Employees
Management
The board
Stakeholders
Shareholder
Customers
Suppliers
Lenders
Internal
Connected
Stakeholders
Government
Pressure groups
Media
Competitors
Trade unions
External
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.
10 of 60
14_CIMA_P3_T21GER_BW0030old
Sarah 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.
11 of 60
14_CIMA_P3_02_CO_0267
Which 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.
12 of 60
14_CIMA_P3_T31IS_BW0009
An 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.
13 of 60
Information 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 systems
Competitive 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).
14 of 60
Which 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.
15 of 60
Luke 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.
16 of 60
14_CIMA_P3_04_MAH_0642
An 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.
17 of 60
14_CIMA_P3_12_MAH_0022
Leo 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: 36,500

7,000 x //sqrt 5
Value at risk
=
=
=
=
15,652, the weekly standard deviation

15,652 x 2.33
36,469
36,500 to nearest 100
18 of 60
14_CIMA_P3_11_MAH_0001
Which 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

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.
19 of 60
14_CIMA_P3_01_MAH_0452
Beta 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.
20 of 60
14_CIMA_P3_FR_Topic4_0010
VMH 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 and utilities (gas and electricity). 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 risk

This 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.
21 of 60
14_CIMA_P3_04_MAH_0657
In 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 apply
Volatility 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.
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.
22 of 60
14_CIMA_P3_04_MAH_0671
A 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.
23 of 60
14_CIMA_P3_IR_Topic5_0011
Which 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
They are a legally binding contract
They operate for a fixed period of time
All 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.
24 of 60
14_CIMA_P3_01_MAH_0454
A 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?
Selling 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.
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.
25 of 60
14_CIMA_P3_01_MAH_0664
The 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.
26 of 60
14_CIMA_P3_01_MAH_1889
Suppose 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).
27 of 60
14_CIMA_P3_11_MAH_0006
Which 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.
28 of 60
14_CIMA_P3_12_MAH_0028
A 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: 4,955,401
The 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 = 4,955,401
The 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.
29 of 60
14_CIMA_P3_01_MAH_1877
The treasurer of Beech Co wishes 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 rate
0.0325 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: $44,280.44
The 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 rate
2 months forward premium
2 months forward rate
2.74
0.03
2.71
Income to the company = 120,000 euros / 2.71 = $44,280.44

30 of 60
14_CIMA_P3_04_MAH_0644
A 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 = $4,590
Sell 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.
31 of 60
14_CIMA_P3_04_MAH_0592
Harvey 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 267,500

Using the M&M formula: Vg = Vu + TBc
Vu = pre-tax cash-flows = 75,000 less tax @30% = 52,500
Discounted at 12% in perpetuity = 52,500 / 0.12 = 437,500
Less initial investment of 200,000 = 237,500
TBc (value of debt x corporate tax rate) = (50% of 200,000) x 30% = 30,000
Vg = 237,500 + 30,000 = 267,500
32 of 60
14_CIMA_P3_04_MAH_0575
General Herbage Ltd has appraised three capital investment projects, and has
produced the following analysis.
Capital
outlay
Project
000
480
600
800
Alpha
Beta
Gamma
PV of
net cash
flows
000
1,050
1,200
1,650
NPV of
project
Profitability
index
000
570
600
850
2.19
2.00
2.06
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.
Projects
Alpha and Beta
Alpha and Gamma
Beta and Gamma
Gamma
Capital required
000
600 + 480 = 1,080
480 + 800 = 1,280; too much
600 + 800 = 1,400; too much
800
Combined NPV
000
570 + 600 = 1,170
850
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.
33 of 60
14_CIMA_P3_INV_T7_0018
BF 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
tropical coastal 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.
34 of 60
14_CIMA_P3_INV_T7_0012
Which 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.
35 of 60
14_CIMA_P3_02_CO_0540
Which 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
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 budget
A 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.
36 of 60
14_CIMA_P3_T81IC_BW0017
Heather 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 prices
II. Controllable costs
III. Apportioned head office costs
IV. Capital investment in the centre
I 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.
37 of 60
Which of the following represent key areas of control of the sales system?
Confidentiality
Authorisation
Custody
Recording
Payment
Authorisation
Custody
Recording
Controls 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.
38 of 60
Z 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
Passwords given to users rather than users selecting their password
Staff given a formal warning if passwords are revealed
Frequent changes of password
Displaying 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.
39 of 60
14_CIMA_P3_04_iAU_0111
Which 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.
40 of 60
14_CIMA_P3_08_CO_0007
Which TWO of 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
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.
41 of 60
14_CIMA_P3_T81IA_BW0003
The 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 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
Unlike 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.
42 of 60
14_CIMA_P3_01_iAU_0154
The two principal forms of computer 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.
43 of 60
14_CIMA_P3_ALQ_S5_0016
Debbie 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?
External relationships
Independence
Skills and knowledge
Authority
Effective management
Social responsibility
Independence
Skills and knowledge
Authority
Effective management
44 of 60
14_CIMA_P3_01_iAU_0134
Dandy 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.
45 of 60
14_CIMA_P3_01_iAU_0349
The 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.
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.
46 of 60
14_CIMA_P3_T81MAC_BW0019
The 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.
47 of 60
Which 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
A commitment to getting things right first time'
A customer focus
Quality certification programmes
Under TQM, there is a commitment to getting things right first time. Quality is builtin, 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.
48 of 60
A 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 system
Just-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.
49 of 60
Peach 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.
50 of 60
14_CIMA_P3_09_MAH_1023
Which 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.
51 of 60
14_CIMA_P3_04_MAH_0613
Installing 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).
52 of 60
Joe 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.
53 of 60
Complete the statement using one of the words below.
volume
velocity
variety
veracity
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 of
.
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 of velocity.
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.
54 of 60
14_CIMA_P3_FR_Topic4_0013
A 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 risk
Cultural 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.
55 of 60
14_CIMA_P3_04_MAH_0674
A 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%.
options at a strike price of 8% and bought a matching series of put options at 9%.
options at a strike price of 9% and sold a matching series of put options at 9%.
options at a strike price of 9% 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 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%.
56 of 60
14_CIMA_P3_04_MAH_0654
If 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.
57 of 60
14_CIMA_P3_04_MAH_0593
Kitten 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
58 of 60
14_CIMA_P3_04_iAU_0103
Which 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.
59 of 60
14_CIMA_P3_01_iAU_0013A
Which 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.
60 of 60
Some 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 decisions on distorted financial results
A whistleblower revealing the scheme to the media
The correct answer is: Being perceived as unethical and a poor corporate citizen
An 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.

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1 of 60

PL Co wants to invest $20 million in a new factory that will manufacture a

The correct answer is: 5,974 (to the nearest $'000)

Which of the following statements is NOT a weakness of sensitivity analysis?

an investment may be one-off, and so 'expected' NPV may never

This is a weakness of expected values not sensitivity analysis.

Which one of the following statements identifies a valid disadvantage

The division of responsibilities at the head of an organisation is most simply

The correct answers are:

Organisations have a wide range of stakeholders to consider. One way of classifying

The correct answers are:

Sarah works in the finance department of a management consultancy firm. She is

Which of the following is least likely to have an interest in an organisation's IT

An organisations information function (encompassing information systems and IT)

Information systems and information technology can create competitive advantage.

An expert system uses a database of knowledge combined with programmed rules

The correct answer is: 36,500

15,652, the weekly standard deviation

exports to remain competitive

Currency movements forcing the company to change the selling prices

A strengthening of the currency in which the company pays its principal

Beta Ltd is a UK company trading wholly but is a subsidiary of Mann Gmbh, a

VMH is a high street retailer of entertainment products. In recent months, it has

The correct answer is: Liquidity risk

Volatility in the price of the underlying item;

The current price of the underlying item;

The time to expiry of the option.

They are a legally binding contract

They operate for a fixed period of time

A company wants to secure minimum earnings on deposits of $10 million it will be

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

The treasurer of a UK-based multinational expects to deposit about 30 million in

Which of the following methods of predicting the exchange rate in a year's

A UK company is due to receive 5,000,000 from a German customer in four

2 months forward rate

Income to the company = 120,000 euros / 2.71 = $44,280.44

A eurodollar bank account yields 6% per annum. A company places 200,000 on

The correct answer is 267,500

Given that capital available is restricted to 1,120,000, what investments would

BF Ltd is considering an investment and wishes to know if it has any way of

activity will be successful. Preliminary investigations of this land previously

Which of the following is a disadvantage of using the certainty equivalent

It is completed without exceeding authorised expenditure

It is completed on time and within budget

A project will be deemed successful if it completed at the specified level of quality, on

Controls of the sales system will be based around:

Good outwards (custody)

Z Co is a business which deals with highly sensitive information. Z Co is considering

Passwords given to users rather than users selecting their password

Staff given a formal warning if passwords are revealed

Frequent changes of password

Standby procedures with another company.

Recovery of affected data.

The internal audit report should include which of the following?

The risks of current practice

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

Skills and knowledge