Free CIMA CS3 Practice Exam with Questions & Answers

A week later, Romuald Marek stops by your workspace and hands you a document.

The Board minute extract from Romuald can be viewed by clicking the Reference Material button above.

Reference Material

Board minutes extract: proposal to profit from ongoing strength of NS

Anna Obalowu Sole, Chief Operating Officer, reported that the strong NS was helping generate revenues from fuel sales. Discussion followed as to whether the strong N$ was likely to persist and whether a strong N$ benefits Arrfield overall.

Markus Jokela. Chief Executive Officer, stated that the Board should develop contingency plans that could be implemented if it seemed likely that the strong N$ would persist. In particular. Arrfield need not renew the contracts that permit aviation fuel suppliers to operate from its airports. Arrfield would then be free to create its own fuel sale business, buying fuel in bulk to replenish the storage tanks at each of its airports in Norland and then selling it directly to airlines He stated that this would almost certainly enhance Arrfield's share price

Romuald Marek reminded the Board that four of Arrfield's six airports are located in Norland and that those airports charge for aeronautical and non-aeronautical services in N$.

A month later, you receive the following email:

Reference Material:

From: Hesham El-Sayed. Independent Non-executive

Director

To: Romuald Marek. Chief Finance Officer

Subject: Collapse of fuel supplier

Hi Romuald

I am writing to give you some advance notice of an internal audit investigation that has been commissioned by the Audit Committee

Just over a year ago. Planejoos, a newly formed company, approached the management team at Airfield's Capital City International (CCI) airport and offered to take over refueling operations at Starport Planejoos offered a higher percentage of revenue than the existing supplier was paying CCI's management team agreed and appointed Planejoos rather than renew the existing supplier's contract.

CCI was unable to conduct the usual background and credit checks on Planejoos for two reasons. Firstly, Planejoos was a new company and so did not have an extensive credit history that could be checked Secondly CCI was under time pressure to reach a decision on whether to renew the existing supplier's contract or allow it to expire

CCI's management team claimed that it had acted quickly in order to benefit from the additional revenue that could be earned from dealing with Planejoos The management team was acting on the basis that it had an ethical duty to maximise the wealth of Airfield's shareholders and that maximising revenues from fuel sales through this agreement with Planejoos was consistent with that ethical duty.

Unfortunately, as a new company. Planejoos struggled to obtain trade credit and the high demand for fuel put the company's cash flows under extreme pressure Receipts from sales lagged behind payments for inventory Planejoos has now collapsed, leaving a large trade receivable that CCI will have to write off as uncollectable CCI had permitted this receivable to accumulate rather

than pressing for payment and so putting Planejoos under further pressure.

Fortunately, the previous fuel supplier was prepared to return to CCI.

Kind regards

Hello

I have attached a news article

Arrfield does not set the price for aviation fuel sold at our airports, but we do receive a percentage of the revenues earned by the fuel companies.

I need your help to prepare for a Board meeting to discuss this matter Please write a paper covering the following

* Firstly, explain the impact that the criticisms voiced by the environmental campaigners will have on the frequent PESTEL analysis that Arrfield's Board conducts.

[sub-task (a) = 34%

* Secondly, evaluate the commercial logic of Arrfield's strategy of basing charges for non-aeronautical services (such as fuel sales and retail activities) on percentages of the revenues generated by the companies that operate at its airports

[sub-task (b) = 33%)

* Thirdly, recommend with reasons whether Arrfield should attempt to justify strategic decisions to its shareholders when the commercial logic of those decisions is not immediately obvious

[sub-task (c) = 33%}

Thanks

Romuald Marek

Chief Finance Officer

You have received the following email from Marcus Svenson, Finance Director:

From: Marcus Svenson, Finance Director

To: Senior Finance Manager

Subject: Investment opportunity

Hi,

The Board is considering an investment opportunity to buy a forest in Bravador, a country in South America. This will be a major expansion and will also enable us to diversify into new lines. For example, the forest contains lots of hardwood varieties that we could sell to companies in the double glazing industry or to furniture manufacturers. I downloaded the attached extract from an online encyclopaedia for your information.

The forest that we are planning to buy has not been used for commercial purposes until now. The land belonged to the Government for many years and it has been left to grow naturally. The Government is now keen to sell the land and has agreed that it may be used for commercial forestry purposes.

This investment will enable us to increase our output of softwoods by up to 20% per year, in addition to enabling us to enter the hardwood market.

I need two things from you. I need you to recommend a suitable approach to managing our relationship with the Bravadorian Government. I also need you to identify and explain the political risks that will remain even if we succeed in creating a sound relationship with the Government.

Marcus

Reference Material:

You are sitting in your office when you hear Marcus Svenson, the Finance Director, speaking on the telephone. You can hear only Marcus’ side of the conversation:

"Hello, I would like to speak to Sally Walker please. It is Marcus Svenson here. (pause)

Hi Sally, you contacted me six months ago to discuss a job opportunity that you thought I’d be suitable for. I said that I didn’t wish to pursue it at that time because I was committed to Wodd. Things have changed since then and I would like to be considered for a finance directorship in another company. (pause)

Yes, I’m still with Wodd. (pause)

Yes, I realise that there was an unfortunate story in the business press about the problems that the weak USD is causing us, but there was very little that I could do to prevent that. (pause)

I am sorry to hear that. I had hoped to move on." (sound of telephone hanging up and door opening)

Marcus discovers that you are sitting at your desk and realises that you would have heard his side of the call.

"Please don’t tell anybody what you heard. Would you regard it as unethical to respect my privacy?

I suspect that the CEO knows that I am thinking of leaving. He commented on the need for Board members to be loyal to Wodd at the last Board meeting. But don’t you agree that the shareholders can better protect themselves against currency fluctuations than the directors?

The crazy thing is that I suspect that the Chairman will dismiss me next month. If that happens, I get a year’s salary as a severance package. That will really annoy the shareholders. How can I justify accepting the severance package if I am effectively being dismissed for failing to manage Wodd’s finances properly?

I need to explain at the next Board meeting why it would have been difficult to evaluate the risk of the USD weakening. According to an article I read, it has been picked up as a serious problem for us. How would you advise me to explain that?"

Reference Material:

Memorandum of Understanding between Fouce Oil and Slide

It is proposed that Fouce Oil and Slide will temporarily combine their exploration activities, with Slide taking overall control in recognition of the greater expertise of its professional exploration staff.

This collaboration will work as follows:

1.Slide will take responsibility for the management and operation of all future exploration activities for the two companies, with effect from 1 October 2015.

2.Fouce Oil will second all of its professional oil exploration staff to Slide. Fouce will continue to employ these staff and will pay their salaries.

3.Slide will brief Fouce Oil’s professional oil exploration staff on all operational matters relating to exploration activities for the duration of this arrangement.

4.The provisions of paragraph 3 will apply to any projects in which Slide participates with third parties on a farm-in or other joint venture basis.

5.In recognition of Slide’s greater expertise, Fouce Oil will offer its entire portfolio of existing exploration rights to this venture, without any charge to Slide. Fouce Oil will also pay for 55% of any and all exploration costs, leaving Slide responsible for the remaining 45%.

6.The revenues from all successful discoveries will be shared equally by Slide and Fouce Oil. In the event that either party wishes to sell an oil well, the other will have the option of purchasing the other’s rights for 50% of the well’s agreed valuation.

7.This arrangement will be subject to review at the end of five years and annually thereafter. In the event that either party wishes to discontinue the arrangement, all ongoing exploration projects will be drawn to an orderly conclusion.

Signed

Thomas Yip, Chief Executive Officer, Fouce Oil

Andrew Jones, Chief Executive Officer, Slide

14 May 2015

Three months has passed since the discussion concerning Fouce Oil’s proposal.

You have received the following email from William Seaton, Director of Finance:

From: William Seaton, Director of Finance

To: Finance Manager

Subject: Fouce Oil’s proposal to collaborate on exploration

Hi,

After deliberating at length on the various discussions that we have had with Fouce Oil since its initial approach, we have decided to proceed.

We need to work out some important details, otherwise this venture will be a disaster.

Please draft a report that covers the following matters:

Should we create a formal coaching and mentoring scheme, whereby members of Fouce Oil’s exploration staff will receive guidance from their counterparts at Slide? Please explain the advantages and disadvantages of doing so very clearly.

Please explain how best to organise a formal coaching and mentoring scheme, if we decide that we should create one.

How should we manage the business relationship between the two companies’ exploration staff for the duration of this arrangement?

What are the difficulties associated with decision-making on exploration issues and how should we address those?

The collaboration goes live in a few weeks and so I need your input urgently so that I can get things moving.

William

The Director of Finance, William Seaton, has stopped you in the corridor:

“Your report was really helpful, but the Board is still considering the implications of that email from Jan Archibald at Fouce Oil. I need to make a more detailed report to the Board and I would like you to draft it for me.

I know that we have owned and operated oil wells in the past, but that has always been with the intention of finding a buyer who is prepared to pay a realistic price. We have chosen never to think about the implications of keeping wells.

I need a report from you that covers the following issues:

The key political risks of retaining our interest in these oil wells, with particular emphasis on high consequence, high

likelihood risks.

A suitable response to each of your political risks.

An overview of how changes in the global economy and the demand for oil could affect the decision to proceed.

The challenges associated with putting together a management team to take charge of the production side of this

proposed new strategy.

I realise that this is a lot to ask of you, but I need you to move quickly because of the interest from our biggest shareholder.”

The following email has been forwarded to you by William Seaton, Director of Finance:

From: William Seaton, Director of Finance

To: Finance Manager

Subject: Email from CFO of Fouce Oil

Hi

This email arrived last night. I need you to help me to think through the various implications of doing what it suggests before I present it to the Board. I need you to focus on the following issues:

Would this proposal make sense from a strategic point of view?

If we did decide to go ahead, what would be the issues that we would have to consider with respect to informing the

stock market?

Could you please email me your thoughts within the next hour? I have to brief the Board later today.

Thanks

William

The email referred to can be found by clicking on the Reference Materials button.

It is now three days since the start of the oil spillage crisis.

You have received the following email from William Seaton, Director of Finance:

From: William Seaton, Director of Finance

To: Finance Manager

Subject: Crisis management issues

Hi,

A quick update on the latest developments.

We have brought Block Associates in to lead the operations on dealing with the oil spill. It has assigned one of its leading consultants to take charge of this for us. We have paid Block Associates an annual retainer for many years, but we have never actually had to call on its services because we have been able to contain any environmental problems using our own resources.

Using Block Associates is going to be expensive. It insists on being free to bring in whatever equipment and personnel are required to resolve matters and to charge that on the basis of cost plus 25%. Our annual retainer is simply the cost of ensuring that it will respond on this basis if required.

We have had some murmurings of discontent already because our own engineers and geologists have made significant progress in identifying the cause of the spillage and they believe that they are capable of bringing it to a successful conclusion. They have suggested that it would be both quicker and cheaper to leave them in charge, while retaining the option to bring in Block Associates at a later date if they fail.

Firstly, what factors should we take into account in deciding whether to leave our own experts in charge of this operation rather than using Block Associates?

Secondly, how should we manage our relationship with Block Associates if we decide that it should be used?

Thirdly, two things: The Board is concerned that Slide’s engineers and geologists have already become disillusioned by the decision to consider calling in Block Associates. We cannot afford to lose their commitment or to see them decide to leave Slide in the longer term. I need you to provide me with some ideas as to how we can motivate them to give their best performance for the duration of this crisis AND to inspire them to remain in Slide’s employment after the crisis has been resolved.

William