cima cimapro19 cs3 1 practice test
Strategic Case Study Exam
Question 1
Reference Material:
You have received the following email from Marcus Svenson, Finance Director:
From: Marcus Svenson, Finance Director
To: Senior Finance Manager
FW: Pricing
Hi,
I am forwarding an email from Sarah Johns.
Sarah has not been with us for very long and this is her first experience of dealing with a currency
price movement.
I am really busy, so I need you to respond to her requests. Please email her as soon as possible.
Marcus
From: Sarah Johns, Marketing Director
To: Marcus Svenson, Finance Director
Subject: USD movement
Hi Marcus,
A lot of our biggest customers are threatening to cancel orders unless we reduce our selling prices.
Timber and associated products are commodity items that are priced in USD, so I thought that our
prices would automatically remain competitive regardless of what happened to the USD. I am
particularly confused over domestic sales, because many of the customers who have threatened to
cancel are based in this country and we invoice them in M$.
Please help me to understand why the M$/USD exchange rate can affect our competitive position in
this way.
I also wish to know why you have chosen to do nothing to hedge against this risk. If you look at the
attached article you will see that the USD is an issue in the business news.
Sarah
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Question 2
Reference Material:
Wodd’s Chief Executive, Peter Sorchi has stopped you in the corridor:
"This weak USD is really causing us some serious problems. I think that it is only a matter of time
before the stock market starts to get nervous and I am worried that our share price will fall in the
near future. Thank goodness it does not appear to have fallen by much so far.
I would like to brief the Board on two main issues tomorrow. Firstly, what can we do as a Board in
order to minimise the negative impact of the weak USD on our share price? Secondly, we know the
identities of the key investment analysts who deal with our industry. Would it be a good idea for us
to brief them? Please also consider the ethical issues arising from both of these topics as well as the
more technical matters.
Please let me have a copy of your briefing notes in advance. I need to be able to sound convincing at
the meeting. I’ll also have my secretary refer you to a really helpful blog."
Answer:
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Question 3
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:
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Question 4
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
Americ
a. 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:
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Question 5
Peter Sorchi, Wodd’s Chief Executive has stopped you in the corridor:
"We signed a memorandum of understanding with the Bravadorian Government last night.
Effectively, we are now the new owners of a forest in a new continent for us. It has already made it
onto the business pages in the press.
Once the formalities are completed, we will be entering into new commercial territory. Our
surveyors have looked at the first area that we intend to develop and there is a lot more hardwood
than we first expected. That is good news in a way because it can be sold at a premium, but we don’t
have any experience of selling hardwood and we are hardly going to pulp it for MDF or paper. I need
you to identify the changes that we will have to make and to recommend how best to manage them.
The funding arrangements are still being worked out. Bravador’s banks are not in a position to fund a
transaction of this size and none of the other banks that we have approached are prepared to lend to
us. We will need to raise additional equity. I realise that we would normally make a rights issue, but I
think that it would be simpler and cheaper to suspend the dividend for a year, which would cover
most of the purchase price in itself. Please advise me on the advantages and disadvantages of doing
that.
It would be ideal if you could let me have a briefing paper on both of these matters urgently."
Reference Material:
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Question 6
You have received the following email from Marcus Svenson, Finance Director:
From: Marcus Svenson, Finance Director
To: Senior Finance Manager
Subject: News reports
Hi,
I have sent you a link to a news site on the internet. Things are getting complicated in Bravador.
Every Board member has been asked to attend a brainstorming session this afternoon, before the
CEO flies out to Bravador this evening. We will be considering the following four matters:
Is it acceptable for us to develop this forest, given the commitment that we have
made with respect to indigenous peoples’ rights? They have been quoted at the end of the news
article.
Is it fair for the environmental protestors to complain that our operations are
unsustainable?
Would it be unethical to offer to build a village, with a proper school and medical
clinic, for the tribe and to offer them work in our forestry operations?
Is it really a good idea for the CEO to fly to Bravador just to appear on the television
news in his boots and overalls?
Please email me your thoughts on each of these matters before I leave for the meeting this
afternoon.
Marcus
Answer:
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Question 7
Newsweb
Protesters block bulldozers
Attempts by Wodd to harvest some of the hardwood trees from their newly acquired Bravadorian
forest suffered a further setback yesterday.
Wodd’s bulldozers have been unable to make any headway in clearing the site for the company’s first
logging base because environmental groups from several countries have descended on the
Bravadorian jungle to protest the proposed destruction of the forest and the associated harvesting of
many rare hardwood trees. Protestors have chained themselves to trees and to heavy equipment,
making it impossible to commence the clearance operations.
Wodd’s problems have been compounded by the recent discovery that a tribe of forest dwellers has
lived in the forest for many generations, making little or no contact with the outside world in the
process. The tribe is effectively nomadic, moving from one part of the forest to another, surviving by
hunting game and gathering edible vegetation and relocating when food starts to become scarce.
The environmental protestors claim that Wodd’s activities will make it impossible for this tribe to
continue with its traditional way of life.
Wodd claims to adhere to The Forestry Stewardship Council of Marland’s ten principles, which
include the assurance that "The legal and customary rights of indigenous peoples to own, use and
manage their lands, territories, and resources shall be recognized and respected."
Reference Material:
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Question 8
Wodd’s Chairman enters your office:
"I am glad I caught you, I am looking for some advice, but I do not wish to involve your boss at this
stage, or any of the other executive directors.
I have been approached by Darrell’s Chairman concerning the possibility of a merger between our
two companies. I was a little surprised because it has apparently, according to a press article, been in
talks with at least one of our competitors and I suspect that it is keen to merge with any large
company that can offer some synergy. I understand that Tabel, another major forestry company, has
already rejected its proposal.
I happen to know that Darrell has invested a little too heavily in its new MDF factory. It is state of the
art, but it has to operate at close to full capacity in order to be economic and Darrell just hasn’t got
sufficient forestry resources to keep the factory operating at full volume without destroying its own
forests.
We are attractive to merge with because we own large forests that can sustain Darrell’s needs. We
don’t manufacture MDF ourselves, but we have lots of experience of supplying this market with raw
material. We would divert lots of this output to Darrell’s factory. Darrell believes that it would be
possible to dominate the MDF industry if it merged with a company such as ourselves. The fact that
we were quite liquid at the end of last year also helps, because I understand that Darrell is having a
few cash flow problems.
Its Chairman proposes a full merger. This will be achieved by the creation of a new parent company
which will acquire existing equity in both companies through an exchange of shares. He and I will
head a special nomination committee to select the most suitable Board for the new company and
then I will step down from the Board while he continues as Chairman of the new company.
Needless to say, this is all highly confidential.
Do you think that it sounds as if there are potential and achievable synergies between Wodd and
Darrell?
Would you regard it as a gross ethical breach to keep this conversation just between the two of us for
the time being, without warning your boss, until I have had the chance to negotiate further with my
counterpart at Darrell?"
Reference Material:
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Question 9
Four weeks have passed since your encounter with the Chairman. The directors of both companies
were informed of the proposal to merge two weeks ago and the public was informed two days ago.
You have received the following email from Marcus Svenson, Finance Director:
From: Marcus Svenson, Finance Director
To: Senior Finance Manager
Subject: Merger negotiations
Hi,
Please see the attached table and also a comment that I downloaded from a Wodd shareholder’s
blog, showing the market capitalisations for Wodd and Darrell both before and after the merger
announcement.
If I am reading this correctly, it would appear that we are suffering at the hands of Darrell because
the market believes that it is getting more of the benefit from the merger. This is before the terms of
the merger have even been announced.
I need you to do two things:
Please draft a formal response to Market Blogger’s post. We will insert this into his blog as a formal
response from Wodd’s Board and we will also email it to all shareholders.
Please draft an outline strategy for negotiating with Darrell’s Board. Clearly, I want Wodd’s
shareholders to get the best possible deal out of this merger.
Marcus
Reference Material:
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Question 10
The formal merger with Darrell has been negotiated and the legal formalities have been completed.
The two company management teams are working on the integration of the two businesses.
You receive an email from Peter Sorchi, the Chief Executive of the merged company:
From: Peter Sorchi, Chief Executive Officer
To: Senior Finance Manager
Subject: Integration of IT and treasury
Hi,
I need you to advise me on a couple of matters. The attached press clipping shows how sensitive this
is.
We need to integrate the IT and treasury functions of the former Wodd and Darrell. I thought that it
would be a simple matter of identifying the common ground and slimming down both companies’
departments to cover the new entity, but I have the heads of both IT and treasury from each
company arguing that their approaches are better for the merged group and that they should take
the lead.
Wodd’s Treasurer claims to be an expert in natural hedging of currency risks and Darrell’s argues that
her department was highly successful because it makes excellent use of derivatives for hedging. Both
agree only on the fact that they cannot work together. I am afraid that I have to agree with them on
that and the Board will have the difficult decision of choosing between them.
I have the opposite problem with the IT function. The two Heads of IT are excited to be able to
combine their databases and to develop their respective interests in Big Dat
a. They claim that we should retain all of the professional staff in both departments and possibly
even expand the merged IT Department beyond that. Given the rationalisation in all of our other
functions, I do not think that we can agree to that, but I would hate to throw away a worthwhile
opportunity.
Please give me your thoughts on the following:
What approach to hedging is more likely to meet our needs: natural hedging or
heavy use of derivatives?
Ignoring hedging, what other factors should we consider in deciding between the
two treasurers?
Are the two heads of IT likely to be correct in arguing that we need to retain all
existing IT staff in order to exploit synergies in data, particularly opportunities to leverage Big Data?
What would the challenges be in motivating them to reduce their joint staffing levels
and how might we deal with these?
Peter
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Question 11
Newsweb
Wodd and Darrell announce plans for restructuring
True to form, the ink was barely dry on the last contract before the corporate restructuring experts
arrived to "counsel out" the staff who have become "surplus to requirements". Wodd and Darrell
have still to agree on a new name for their merged entity, but they have already announced the need
for "efficiency savings". The first redundancy notices have already been issued and many more are
expected to follow over the next few weeks.
Answer:
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Question 12
You have received the following email from Marcus Svenson, Finance Director:
From: Marcus Svenson, Finance Director
To: Senior Finance Manager
Subject: Biomass proposal
Hi,
The Board has just heard a presentation by an engineering consultancy concerning a proposal to
develop a biomass power station adjacent to our North Forest.
The Board has asked us to put together some thoughts about the merits of this proposal. We would
proceed on the basis that we would build the power station and sell the resulting electricity to the
national power generator which has a number of coal-fired power stations, each of which is nearing
the end of its useful life and the coal has to be shipped in, so we should find it relatively easy to
guarantee sales. The power generator has indicated that it would be possible to negotiate a three
year contract in the first instance, with the expectation that this would be extended by subsequent
three year contracts, subject to price and performance.
We would be responsible for building and operating the power plant and we would also have to pay
for 50% of the cost of power lines for connecting to the national electricity grid, with the other 50%
being funded by the national power generator.
Please draft a briefing paper that I can present to the Board on the following:
How can we predict whether the share price is likely to increase or decrease if we commit ourselves
to this project? You should identify the challenges associated with answering that question and
indicate how we might address them.
What are the long-term risks associated with future revenues from the sale of electricity? How might
we manage these?
Marcus
Reference Material:
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Question 13
Six months have passed. Wodd has announced its intention to create a biomass power station in its
North Forest, to be fuelled by trees from the North Forest itself and also waste biomass products
from other timber land owned by Wodd in that area.
The news has received mixed reactions. Younger residents of the small towns close to North Forest
were delighted because their local economy will be boosted. Older residents and those living further
afield within the region complain that the power station will pollute the environment and the
destruction of the North Forest will blight an area of outstanding beauty. A residents’ group has been
established online, with support from Marland’s largest environmental lobbying group, to block the
proposal.
You have received the following email from Marcus Svenson, Finance Director:
From: Marcus Svenson, Finance Director
To: Senior Finance Manager
Subject: Stakeholder issues
Hi,
I have sent you a link to the website created by the protestors against the biomass power station.
This is causing serious problems because we still need to gain formal Government approval, although
the Government supports biomass as an energy source as it is far cleaner and more sustainable than
fossil fuel and far less controversial than nuclear. Needless to say, the press has picked up on this and
is starting to run the story.
We had reached agreements in principle with Marland Bank for funding for this project and with a
civil engineering contractor for the construction work, but both are now nervous about signing
contracts because neither wishes to be associated with an environmental scandal.
I need two things from you.
Please draft the body of a press release that we can issue in response to the claims on the protestors’
website. Add a few comments to explain what your arguments are trying to achieve (I don’t want us
simply to state that we disagree with the protestors, I want us to offer meaningful arguments in
response). Just write your draft as part of your reply to this email and I will circulate it to the other
Board members for approval before we submit it.
Please suggest some safeguards that we can put in place to enable us to retain the support of the
bank and the civil engineer throughout this project.
Marcus
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Question 14
Save North Forest!
North Forest is located in an area of outstanding natural beauty that also includes a number of small
towns and villages. Many local residents moved into the area after retiring and were attracted by the
opportunity to breathe fresh air and be surrounded by beautiful views. In doing so, we have brought
wealth into a local economy that was struggling because there was little employment to encourage
younger people born in the area to stay.
Wodd plans to destroy North Forest in order to fuel a power station that will, in itself, spoil the view
as well as polluting the atmosphere.
Globally, vast areas of forests are cleared every year for commercial exploitation. This creates untold
risks for the planet because trees are responsible for giving us breathable air.
Local residents are working together with Green Marland, Marland’s largest environmental
campaigner, to draw attention to the damage that Wodd is threatening to inflict on this area.
We ask you to write to the Government planning department to ask it to refuse to issue a permit for
this development. We also ask you to sign our online petition and to consider joining us in peaceful
and non-violent direct action against the bulldozers in the event that our efforts to block the granting
of a Government permit should fail.
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Question 15
Two months have passed since the threatened disruption of the building work on the biomass power
station. The threat has been resolved and work is again under way on the development.
You have received the following email from Peter Sorchi, CEO:
From: Peter Sorchi, Chief Executive Officer
To: Senior Finance Manager
Subject: Wildlife survey
Hi,
I tried to obtain some trustworthy advice from your boss this afternoon, but have come away feeling
quite unsure that we are on the same wavelength.
As you know, the law in Marland is very clear concerning the protection of rare species of wildlife.
Before building work commences on our new power station the Government will send a survey team
to check for the presence of protected species. The attached article shows how sensitive an issue this
can be.
As part of our corporate social responsibility, every one of Wodd’s forestry teams has a small team of
wildlife officers, whose job is to survey the forest and to identify all natural habitats. Trees can grow
undisturbed for many years in a commercial forest before they are harvested and so natural habitats
can become well established. Our wildlife surveys enable us to limit the harm done when trees are
felled.
One of Wodd’s wildlife officers in the North Forest has submitted a report on the sighting of a rare
species of bat in the area that will be cleared for the power station. The report states that these
creatures tend to be difficult to observe because they only come out very late at night and tend to
roost in dense forest. This could, potentially, delay the start of work for six months while the bats are
captured and relocated. Relocating the bats will also be expensive.
The Finance Director’s advice was to ask the wildlife officer to change the report, stating that the
original version was submitted in error and that the sighting occurred in a completely different part
of the forest, well away from the planned construction site. There is only a small possibility that the
Government inspectors will find the bats during their own inspection. In the event that they do then
Wodd can claim that it was unaware of the bats’ presence.
This whole exchange raises a number of issues for me.
Should we spend shareholder money on protecting wildlife in our forests?
What are the implications for our internal control system of the Finance Director
asking for this report to be changed?
What are the difficulties in motivating our wildlife officers and how might we
overcome these?
The Chairman is always complaining about how the executive directors are too
aggressive when it comes to making a profit. How might I address that concern?
I would appreciate your response on each of the above issues.
Peter
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