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

C Ltd is a private, family-owned company which is hoping to become listed on a recognised Stock Exchange within the next two years. At the moment, the Board of Directors comprises five directors; four of whom are from the founding family and all of whom are involved in the day-to-day running of the business. The remaining director obtained a seat on the Board threeyearsagoas a condition of an investment by a venture capital fund.The Board meets in half-day sessionsonce a fortnight and the Board meetings are reasonably well run. All decisions are taken by the Board as a whole. There are no sub-committees.Which of the following steps would it be appropriate for C Ltd to take in the light of the proposed listing?

• Appoint enough independent non-executive directors (NEDs)that they make up at least 50% of the Board.
• Appoint one of the NEDs as Chair of the Board.
• Insist that the venture capital company director be removed as he is not necessarily motivated to act in the best interests of C Ltd.
• Set up at least three sub-committees namely remuneration, nomination, and audit committees.
• Ensure that the current executive directors are given 10 year contracts starting on the day the company is floated, to ensure consistency and continuity in the management of the company.
• Set up an 'agenda setting' sub-committee consisting of the current executive directors to decide the agenda for each Board meeting.

H Ltdis a company providing postal and courier services to small businesses. Customers pay a monthly or annual subscription fee to use the service, plusaverysmall fee for each item delivered.A year ago, H employed a newsalesteam. Their remuneration is dependent on the number of new customers they sign up. Sales increased dramatically in the first six months, but nowdifficulties are emerging such as new customers dropping their subscription once the initial period has expired; subscriber direct debits being returned unpaid; subscribers going out of business and other similar issues.Which of the following would be appropriate to help resolve these problems?

• Alter the pricing structure in order to increase the price for sending each item but decrease the subscription element of the fee.
• Ensure that a credit check is carried outbefore a subscriber is accepted.
• Reduce the rate of commission payable to any sales person who fails to sign up at least an agreedminimum number of customers each month.
• Alter the commission arrangements so that commission is payable only when the subscriber signs up for a second year.
• Preparing a monthly report for sales persons detailing the performance of each new customer they have signed up over the previous year.

A project has been evaluated on the basis that it will cost $14 million and will have a net present value of $2.3 million.The project has commenced and $3 millionof the initial $14 million has been invested. A problem has been discovered that will cost an additional $2.5 million to rectify. The $2.5 million will be payable immediately.What is theNPV of continuing with this project?

• -$3 million
• -$0.2 million
• $1.8 million
• $2.8 million

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?

• There is no acceptable level of risk for a major nuclear accident and so the probability has little information value in itself.
• The probability is so low as to be ignored.
• The directors will be able to argue that they were not negligent in the event of a major disaster within the 20 year period.
• The calculation of a precise probability demonstrates that the engineers who conducted the inspection are experts in their field.

KLtdisan on-line travel agency specialising in budget package holidays to a small number of popular locations. The holidays that it sells are made up of a 'package' of flights, hotel accommodation and food. K Ltd's Finance Director is concerned that the company'sscope of operation is too narrow and wishesto diversify.IdentifyTWOactions that K Ltdshould take immediately.

• Set up a number of activity holidays; adventure, sports and trekking for example.
• Bulk book cruise accommodation and create a special package deal for retired couples.
• Expand the number of locations it currently serves.
• Re-image the locations it currently serves to make them more exotic and family friendly.
• Review the customer base looking at feedback, repeat sales and single visit statistics.
• Engage market researchers to look at future trends in holiday requirements.

M, a manufacturing company, has had some problems with defects in one of the main productsitproduces. This product has been made by the company for many years and is very profitable. Last monthithad over 300 defects reported by customers which is more than 15% of products sold. This is a reputation risk for M and is also affecting profitability.Which of the following controls could M introduce to reduce defects and also increase profitability?

• M could increase the number of quality control staff.
• M could introduce a procedure where quality control staff sign a form at the end of each dayto say they have examined 1 in 10 products for defects and they are satisfied with the quality.
• The production director could examine one in every 10 products and sign a form to say they are satisfactory.
• M could service machinery at least once a month as recommended by the machinery supplier.
• M could check all employees qualifications to ensure they are qualified for their jobs.

Which of the following is NOT a financial risk.

• Selling goods on credit terms.
• Taking out variable rate loans to finance short term investments.
• Sourcing raw materials overseas to manufacture goods.
• Global warming.

GHJ makes large export sales to customers in Country A, whose currency fluctuates significantly against GHJ's home currency. GHJ also makes large purchases from suppliers in Country

• All of these transactions are in Country A's currency. GHJ's Treasurer does not actively hedge currency risks because there is a natural hedge in place due to the company making both sales and purchases in the same currency. GHJ's Board has instructed the Treasurer to put active hedging measures in place because the Risk Report would otherwise have to disclose the fact that GHJ has a currency risk which is not actively hedged. Which of the following statements are correct?
• The Board may be concerned it will be criticised if it does not hedge.
• Risk reports can change behaviour.
• The Board does not want to be blamed for ignoring a risk.
• Risk reporting is a bad thing.
• Risk reporting drives the whole risk management process.

An oil company has entered into a joint venture with a competing oil company to develop a new oil field. The joint venture arrangement is intended to mitigate the risks associated with developing the oil field.The following disclosure appears in the oil company's risk report:'Many of our large projects and operations are conducted through joint ventures. These arrangements involve complex risk allocation and indemnification arrangements and we have less control over these activities than we would have if we had full ownership and control. Our partners may have economic or business interests that are opposed to ours, and may exercise the right to block key decisions or actions.We believe the joint arrangement is in our best interest.'Which of the following statements are correct?

• The risk report means that the shareholders know exactly how bad the risk is.
• The risk report says nothing useful about the risk.
• Now the shareholders know the directors are aware of the risk.
• If the risk report had not reported the risk the shareholders might not have been aware of the risk.
• The shareholders now have more useful information.

The managers of a company are agents for the shareholderstasked with increasing shareholders' wealth. Which of the following will usually increase shareholders' wealth?

• Investing in projects with the shortest payback period.
• Investing in projects with positive net present value.
• Investing in projects with the greatest level of risk.
• Not paying a dividend for several years in order to invest innew projects.