CIMA CIMAPRA19-P03-1 Exam Practice Test Instant Access

Question 1

A UK manufacturing company has simultaneously:

* purchased a put option to sell USD 1million at an exercise price of GBP1.00 = USD1.65

* sold a call option that grants the option holder the right to buy USD 1million at a price of GBP1.00 = USD1.61(this option has the same maturity date as the put).

Which of the following is a valid explanation for entering into these option positions?

AThe company expects to receive USD 1million from a customer and wishes to offset the cost of the put option by the premium on the call option.

BThe company expects to pay USD 1million to a supplier and wishes to offset the premium from the call option against the cost of the put option.

CThe company expects to receive USD 1million from a customer and wishes to obtain an additional benefit if the USD strengthens beyond GBP 1.00 = USD 1.61.

DThe company expects to pay USD 1million to a supplier and wishes to obtain additional protection against the USD strengthening beyond GBP 1.00 = USD 1.65.

Answer : A

Question 2

H is a senior production manager for PLtd which isabout to make a strategic decision on setting up a new production line requiring $3 millionof new specialist equipment.

H's daughter is friends with and goes to school withthe daughter of T, the sales manager in KKLtd. KK Ltd isa potential supplier ofthespecialist equipment that P Ltd requires.

T owns a holiday home. H's daughter regularly accompanies T's daughter on family vacations at this holiday home, all at T's expense.

H is theonly person working for P Ltd who is qualified to select the specialist equipment. KK Ltd will definitely bid for the sale.

What should H do?

AH should exclude KK Ltd from the bidding process.

BH should declare an interest and withdraw from the assessment process.

CH should permit KK Ltd to bid, but should insist that T should not be involved.

DH should declare an interest, giving details of his daughter's friendship with T's daughter, but should participate fully in theassessment process.

Answer : D

Question 3

YHJ is considering an investment in a project that will cost $20 million. Annual fixed costs will be $12 million per year, excluding depreciation. Annual sales are forecast at 5 million units, with a contribution per unit of $8. After five years the equipment will be worn out and YHJ will have to spend $50 million on disposal costs. The discount rate is 10%.

Calculate the sensitivity of the net present value of this project to a 20% increase in the disposal costs.

A11%

B13%

C31%

D20%

Answer : A

Question 4

Which of the following statements are true of residual risk?

AResidual risk has to be accepted.

BResidual risk is the risk that remains after risk mitigation has taken place.

CIf residual risk is too great then the company should not expose itself to the risk situation.

DResidual risk may be accepted if management feels the companycan bear the risk.

EResidual risk should never be accepted.

Answer : B, C, D

Question 5

TYU is a retailer selling televisions. The company is financed wholly by equity.

Why might TYU be exposed to interest rate risk?

ACustomers' disposable income may change.

BTYU's competitors may have variable rate borrowings.

CTYU's suppliers may have borrowings.

DTYU's cost of capital will vary with interest rates.

ETYU's competitors may have fixed rate borrowings.

Answer : A, B, C

Question 6

Which of the following represents the greatest risk associated with introducing a system of post-completion audit for investment projects?

ADecision makers may be deterred from taking responsible risks.

BThe entity will realise that its approach to project appraisal is flawed.

CThe audit itself will waste time.

DThe entity may withdraw from a project without good cause.

Answer : A

Question 7

An electricity company owns and operates a nuclear power station located ten miles from a large city. A recent and very extensive engineering examination of the power station concludes with the estimate that the probability of a major nuclear disaster within the next 20 years is 0.2%.

Which of the following best explains the relevance of quantifying the risk in that way?

AThere is no acceptable level of risk for a major nuclear accident and so the probability has little information value in itself.

BThe probability is so low as to be ignored.

CThe directors will be able to argue that they were not negligent in the event of a major disaster within the 20 year period.

DThe calculation of a precise probability demonstrates that the engineers who conducted the inspection are experts in their field.

Answer : A

CIMA P3 Risk Management (Online) CIMAPRA19-P03-1 Exam Practice Test