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DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO

The Chartered Institute of Management Accountants 2012

P3Performance

Strategy

Performance Pillar

P3 Performance Strategy

21 November 2012 Wednesday Morning Session

Instructions to candidates

You are allowed three hours to answer this question paper.

You are allowed 20 minutes reading time before the examination beginsduring which you should read the question paper and, if you wish, highlightand/or make notes on the question paper. However, you will not be allowed,under any circumstances, to open the answer book and start writing or useyour calculator during this reading time.

You are strongly advised to carefully read ALL the question requirementsbefore attempting the question concerned (that is all parts and/or sub-questions).

ALL answers must be written in the answer book. Answers written on thequestion paper will not be submitted for marking.

You should show all workings as marks are available for the method you use.

The pre-seen case study material is included in this question paper on pages2 to 6. The unseen case study material, specific to this examination, isprovided on pages 8 to 9.

Answer the compulsory question in Section A on page 11. This page isdetachable for ease of reference

Answer TWO of the three questions in Section B on pages 14 to 19.

Maths tables and formulae are provided on pages 21 to 24.

The list of verbs as published in the syllabus is given for reference on page27.

Write your candidate number, the paper number and examination subject titlein the spaces provided on the front of the answer book. Also write yourcontact ID and name in the space provided in the right hand margin and sealto close.

Tick the appropriate boxes on the front of the answer book to indicate whichquestions you have answered.

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November 2012 2 Performance Strategy

Pre-seen case study

V, a private limited company in a European country (SK), which is outside the Eurozone, wasfounded in 1972. The currency in SK is SK$. V is a travel business that offers three holiday(vacation) products. It has a network of 50 branches in a number of major cities throughout SK.

History of the companyV achieved steady growth until six years ago, when it found that its market share was erodingdue to customers increasingly making online bookings with its competitors. Direct bookings forholidays through the internet have increased dramatically in recent years. Many holidaymakersfind the speed and convenience of booking flights, accommodation or complete holidays onlineoutweighs the benefits of discussing holiday alternatives with staff in a branch.

Vs board had always taken the view that the friendly direct personal service that V offersthrough its branch network is a major differentiating factor between itself and other travelbusinesses and that this is highly valued by its customers. However, V found that in order tocontinue to compete it needed to establish its own online travel booking service, which it did fiveyears ago. Until this point, Vs board had never engaged in long-term planning. It had largelyfinanced growth by reinvestment of funds generated by the business. The large investment in IT

and IS five years ago required significant external funding and detailed investment appraisal.

Much of Vs business is now transacted online through its website to the extent that 60% of itsrevenue in the year ended 30 June 2012 was earned through online bookings.

Current structure of Vs businessV offers three types of holiday product. These are known within V as Package, Adventure andPrestige Travel. V only sells its own products and does not act as an agent for any other travelcompanies. It uses the services of other companies engaged in the travel industry such aschartered airlines and hotels which it pays for directly on behalf of its customers.

PackagePackage provides holidays mainly for families with children aged up to their late teens. These

typically are for accommodation in hotels (where meals are part of the package) or self-cateringapartments (where no meals are provided within the package).

AdventureAdventure caters for people aged mainly between 20 and 30, who want relatively cheapadventure based holidays such as trekking, sailing and cycling or who wish to go on inexpensiveback-packing holidays mainly in Europe and Asia.

Prestige TravelPrestige Travel provides expensive and bespoke holidays mainly sold to couples whosechildren have grown up and left home. The Prestige Travel product only providesaccommodation in upmarket international hotel chains in countries across the world.

All three of these products provide holidays which include flights to and from the holidaydestinations and hotel or self-catering accommodation. V has its own customer representativesavailable at the holiday destinations to provide support to its customers. All-inclusive holidays (inwhich all food and drinks are provided within the holiday price) are offered within each of thethree product offerings.

Support productsV supports its main products by offering travel insurance and foreign currency exchange. Thetravel insurance, which is provided by a major insurance company and for which V acts as anagent, is usually sold along with the holidays both by branch staff and by staff dealing with onlinebookings.

Currency exchange is available to anyone through Vs branches irrespective of whether or not

the customer has bought a holiday product from V. A new currency exchange product isprovided by V through which a customer purchases an amount of currency, either in SKs home

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Performance Strategy 3 November 2012

currency (SK$) or else in a foreign currency and this is credited on to a plastic card. The card isthen capable of being read by automated teller machines (ATMs) in many countries across theworld allowing the customer to withdraw cash in the local currency up to the amount that hasbeen credited on to the card.

Marketing of products

V relies for the vast majority of its business on the literature, available in hard copy and online,which it provides on the holiday products it sells. Exceptionally, V is able to offer some of itsexisting holiday products at discount prices. These may be offered under any of the three mainproducts offered but they are mostly cut-price holiday deals which are available under thePackage holiday product label.

Sales structureStaff in each of the 50 branches accept bookings from customers and all branches have direct ITaccess to head office. Online enquiries and bookings are received and processed centrally athead office, which is located in SKs capital city.

Branch managers have some discretion to offer discounts on holidays to customers. V offers adiscount to customers who buy holidays through its online bookings. The branch managers have

authority to reduce the price of a holiday booked at the branch up to the amount of the onlinediscount if they feel it is necessary to do so in order to make the sale.

Financial informationVs revenue, split across the holiday and support products offered, for the financial year ended30 June 2012 is summarised as follows:

RevenueSK$ million

Package 90Adventure 60Prestige Travel 95Support products 5

The overall net operating profit generated in the financial year to 30 June 2012 was SK$35million and the profit for the year was SK$24 million, giving a profit to sales ratio of just under10%. Vs cash receipts fluctuate because of seasonal variations and also because Vscustomers pay for their holidays shortly before they depart.

Further details, including extracts from Vs income statement for the year ended 30 June 2012and statement of financial position as at 30 June 2012 are shown in Appendix 1.

Financial objectivesVs key financial objectives are as follows:

1. To grow earnings by, on average, 5% a year.

2. To pay out 80% of profits as dividends.

Foreign exchange riskV has high exposure to foreign exchange risk as its revenues received and payments made arefrequently in different currencies. It normally settles hotel bills and support costs, such astransfers between hotels and airports in the local currencies of the countries where the hotelsare located. It normally pays charter airlines in the airlines home currency. Scheduled airlinecharges are settled in the currency required by the particular airline.

V is exposed to fluctuations in the cost of aircraft fuel incurred by airlines which are passed on totravel businesses. It has often been necessary for V to require its customers to make asupplementary payment to cover the cost of increases in aircraft fuel, sometimes after thecustomer had thought that the final payment for the holiday had been made.

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Board composition and operational responsibilitiesThe Board of Directors comprises five people: an Executive Chairman (who also fulfils the role ofChief Executive), a Finance Director, an Operations Director, an IT Director and a HumanResources Director. The Executive Chairman founded the business in 1972. He has threegrown-up children, two of whom successfully pursue different business interests and are notengaged in Vs business at all. The third child, a son, is currently taking a year out from study

and is going to university next year to study medicine.

The branch managers all report directly to the Operations Director. In addition, the OperationsDirector is responsible for liaising with airlines and hotels which provide the services offered byVs promotional literature. The IT Director is responsible for Vs website and online enquiries andbookings. The Finance Director is responsible for Vs financial and management accountingsystems and has a small team of accountancy staff, including a part-qualified managementaccountant, reporting to her. The Human Resources Director has a small team of staff reportingto him.

ShareholdingThere are 90 million SK$0.10 (10 cent) shares in issue and the shareholdings are as follows:

% holdingExecutive Chairman 52Finance Director 12Operations Director 12IT Director 12Human Resources Director 12

EmployeesV employs 550 full-time equivalent staff. Turnover of staff is relatively low. High performancerewards in terms of bonuses are paid to staff in each branch if it meets or exceeds its quarterlysales targets. Similarly, staff who deal with online bookings receive a bonus if the onlinebookings meet or exceed quarterly sales targets. Vs staff, both in the branches and thoseemployed in dealing with online bookings, also receive an additional bonus if they are able to sell

travel insurance along with a holiday product to customers.

Employee development for staff who are in direct contact with the public is provided throughupdates on products which V offers. Each member of branch and online booking staffundertakes a two day induction programme at the commencement of their employment with V.The emphasis of the induction programme is on customer service not on details relating to theproducts as it is expected that new staff will become familiar with such product details as theygain experience within V.

SafetyV publicly states that it takes great care to ensure that its customers are as safe as possiblewhile on holiday. To date, V has found that accidents while on holiday are mainly suffered byvery young children, Adventure customers and elderly customers. There has been an increase

in instances over the last year where customers in resort hotels have suffered severe stomachcomplaints. This has particularly been the case in hotels located in resorts in warm climates.

Executive Chairmans statement to the pressVs Executive Chairman was quoted in the national press in SK in January 2012 as saying, Weare maintaining a comparatively high level of revenues and operating profit. This is in a periodwhen our competitors are experiencing very difficult trading conditions. We feel we areachieving this due to our particular attention to customer service. He cited Vs 40 years ofexperience in the travel industry and a previous 99% satisfaction rating from its customers as thereasons for its success. He went on to state that V intends to expand and diversify its holidayproduct range to provide more choice to customers.

Board meeting

At the next board meeting which took place after the Executive Chairmans statement to thepress, the Operations Director expressed some concern. He cast doubt on whether V was able

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to provide sufficient funding, marketing and IT/IS resources to enable the product expansion towhich the Executive Chairman referred. The Operations Director was of the opinion that Vplaces insufficient emphasis on customer relationship marketing. The Finance Director addedat the same meeting that while V presently remained profitable overall, some products may bemore profitable than others.

The Executive Chairman responded by saying that Vs high level of customer service provides asufficiently strong level of sales without the need to incur any other marketing costs. He addedthat since V achieved a high profit to sales ratio, which it has managed to maintain for a numberof years, it really didnt matter about the profits generated by each customer group.

Retirement of the Executive ChairmanThe Executive Chairman formally announced to the Board in July 2012 that he intends to retireon 30 June 2013 and wishes to sell part of his shareholding in the company. The Boardmembers believe the time is now right for V, given its expansion plans, to enter a new stage inits financing arrangements, in the form of either debt or equity from new providers.

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APPENDIX 1

Extracts from V's income statement and statement of financial position

Income statement for the year ended 30 June 2012

Notes SK$ millionRevenue 250Operating costs (215)Net operating profit 35Interest income 3Finance costs (4)Corporate income tax 1 (10)PROFIT FOR THE YEAR 24

Statement of financial position as at 30 June 2012

Notes SK$ millionASSETS

Non-current assets 123Current assetsInventories 3Trade and other receivables 70Cash and cash equivalents 37Total current assets 110Total assets 233

EQUITY AND LIABILITIESEquityShare capital 2 9Share premium 6Retained earnings 60

Total equity 75

Non-current liabilitiesLong-term borrowings 3 50Revenue received in advance 3Current liabilitiesTrade and other payables 35Revenue received in advance 70Total liabilities 158Total equity and liabilities 233

Notes:

1. The corporate income tax rate can be assumed to be 30%.2. There are 90 million SK$0.10 (10 cent) shares currently in issue.3. 30% of the long-term borrowings are due for repayment on 30 June 2014. The remainder is

due for re-payment on 30 June 2020. There are debt covenants in operation currently whichrestrict V from having a gearing ratio measured by long-term debt divided by long-term debtplus equity of more than 50%.

End of Pre-seen Material

The unseen material begins on page 8

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SECTION A 50 MARKS

[You are advised to spend no longer than 90 minutes on this question.]

ANSWER THIS QUESTION.THE QUESTION REQUIREMENTS ARE ONPAGE 11, WHICH IS DETACHABLE FOR EASE OF REFERENCE

Question One

Unseen case material

Customer safetyV has received a large claim for compensation on behalf of customers who had travelled to acountry that had been a popular holiday destination for many years but which suffered from civilunrest in July 2012 which is the peak holiday season. The unrest included protests, fighting withthe police, and the destruction of government offices throughout the country. Initially the unrestwas in the capital city but it later spread to other towns throughout the country, including the

holiday resort towns. None of Vs customers were injured during the unrest.

When the unrest started a large number of customers who had booked to travel to that countrycontacted V to seek advice. V reassured them, on the basis that there had been no violence inany of the countrys holiday resorts, and advised that they should go on holiday as planned. Vshome government had not advised its citizens against travelling to the holiday resorts in thecountry in question. The terms of the travel insurance that V had sold to most of its customersstate that the cost of a holiday booking will only be refunded on safety grounds if the governmenthas advised against travel.

During the holiday season there was an unexpected series of violent protests in the countrysmajor holiday resorts. V advised its customers to remain within their hotels during the protestsand that flights would be provided to bring them home as soon as order had been restored. Most

customers were brought home before their original scheduled return date, but some weredelayed and did not return home until several days after their due date.

V compensated customers by refunding the cost of the hotel accommodation for any days thatwere lost because of the early return. Many customers were dissatisfied with this and gottogether and responded to a newspaper advertisement published by a large law firm that offersits clients a no win no fee arrangement. The law firm has written to V to request a meeting todiscuss an out of court settlement. The letter states that the settlement should include fullrefunds of the cost of all holidays and compensation for the stress suffered. Additionally it seekscompensation for loss of earnings for the customers who returned home late.

No win no fee services are offered by some law firms in order to attract clients who cannotafford to pay for legal advice. The law firm pursues the clients case. If it is successful then the

law firm claims all legal fees from the defendant, along with the clients compensation. If thecase is lost then the law firm does not make any charge.

Information technologyVs online booking system is not particularly sophisticated. It was developed five years ago whenVs board reluctantly took the view that it needed to offer customers the option of booking online.The site itself has not been modified at all during that time.

Customers can interact with Vs booking system 24 hours a day, seven days a week (24/7).However, Vs system cannot make a final booking with a charter airline or with a holiday hoteloutside of normal office hours. Any out of hours bookings are not processed until the nextworking day. The information is held on Vs server but reservations are not made with the

airlines or hotels until it is processed.

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V has recently run into problems with this system. There have been several cases wherecustomers have booked a holiday using Vs online system but then received an email 48 hourslater to tell them that either the airline or the hotel has rejected the booking because there wereno places available for the dates requested. This problem arises on popular destinationsbecause other travel companies use the same airlines and hotels and these competitorswebsites can communicate directly with the airline and hotel systems on a 24/7 basis.

Vs Finance Director has contacted the major airlines and hotels in order to discuss a permanentconnection to their systems, so that customer bookings could be made immediately regardlessof the time of day. Unfortunately, the airlines and hotels are not willing to permit such anarrangement because V has not updated its software since its online booking system was firstinstalled. That has led to an increasing number of errors that have had to be resolved by theairline or hotel contacting Vs head office staff by telephone or email and having the bookingconfirmed. The airlines and hotels would be unwilling to permit V to offer a 24/7 online bookingfacility unless it upgraded its systems to the latest industry-standard software.

Vs board is concerned that an upgrade could prove disruptive and expensive and is consideringabandoning online bookings altogether.

Currency riskAll of Vs sales are priced in SK$. The companys costs are ultimately fixed in terms of eitherUSD or the local currency of the country in which the holiday is based.

The terms and conditions imposed by the hotels and charter airlines permit them to charge V(and all other travel companies) a supplementary amount to cover any increased costassociated with rising aircraft fuel prices (which are set in USD) or increased hotel and otherlocal costs (which are set in local currencies). These supplementary charges can be made atany time up to the customers date of travel.

V has copied the industry practice of warning customers at the time of booking that it may benecessary to pass on the cost of any increase in the cost of fuel or other holiday charges. V has

frequently charged customers as much as an additional 10% of the cost of their bookingbecause of such additional costs. All such supplements have to be settled by the customer priorto departure.

Vs Sales Manager has asked whether it would be possible to offer customers guaranteed fixedprices, with no fuel or currency supplements. This would mean that any increases would beborne by V and would consequently reduce profits, or to cover this V could set higher sellingprices at the time of booking to allow for potential increases. The Sales Manager argues that it isimpossible to know how this will affect customer demand.

The requirement for Question One is on page 11

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Required:

(a)

(i) Explain why it is difficult for V to advise its customers properly with respect to

the threats arising from civil unrest.(8 marks)

(ii) Recommend, stating reasons, a set of procedures that V should have inplace to deal with the possible outbreak of civil unrest in any of the countriesto which it sends its customers.

(9 marks)

(iii) Evaluate the risks for V arising from the existence of law firms whichadvertise no win no fee services in the national press.

(8 marks)

(b)

(i) Evaluate the risks to V arising from the companys existing online bookingarrangements.

(6 marks)

(ii) Advise Vs IT Director on the steps that should be undertaken in order toupgrade Vs online booking system to offer a 24/7 connection to airline andhotel systems.

(9 marks)

(c) Advise Vs directors on the difficulties associated with evaluating the impactof currency movements on demand for holidays.

(10 marks)

(Total for Question One = 50 marks)

(Total for Section A = 50 marks)

End of Section A. Section B begins on page 14

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SECTION B 50 MARKS

[You are advised to spend no longer than 45 minutes on each question in this section.]

ANSWER TWOOF THE THREE QUESTIONS

Question Two

H is a company that manufactures basic electronic components such as capacitors and printedcircuit boards for the IT industry. The company has recently appointed K as a non-executivedirector. K was the founder and chief executive of a quoted executive recruitment consultancyand employment agency. She has stood down from that role and has accepted the position onHs board in order to seek fresh challenges.

Hs board meets twice every year for a formal discussion of company strategy. These meetingstend to look back at Hs performance for the previous half-year. This discussion mainly focusseson a report based on the monthly management accounts for the previous half year and then

briefly considers the future impact of these. Monthly management accounts are presented to theboard at their monthly board meetings.

K has attended two of the meetings relating to strategy. At the conclusion of the second meetingshe expressed two concerns about the half-yearly board meetings. Firstly the meetings focus onfeedback rather than feed forward. K argued that the board should be constantly forward lookingand aiming to identify new opportunities. K believes that historical summaries of pastperformance distract from the need to plan for the future. Secondly, K believes that the half-yearly meetings focus on details associated with the existing business model rather thanstrategic direction. She believes that it would be a more productive use of the boards time atthese meetings to work towards identifying strategic opportunities that might be pursued over thenext three to five years. When she was chief executive of her employment agency the board metat least once per year and frequently more often to think about new strategies that might be

pursued.

Hs Production Director has complained that K has really misunderstood the boardsresponsibility for the management of H. The Production Director believes that her first argumentis invalid because the distinction between feedback and feed forward control is more about dayto day tactical management rather than strategic management. The Production Director believesthat feed forward is more about fine tuning rather than strategic management. The ProductionDirector also believes that Ks comments about strategic direction demonstrate a very limitedunderstanding of manufacturing electronics. H must respond and react to the requirements ofthe IT industry. H cannot really innovate. The life cycle of the companys products is such thatchanges to Hs strategic direction happen infrequently. The Production Director has suggestedthat K should restrict her comments to the information prepared for consideration by the fullboard, especially as she has come from the service sector and has no real understanding of

manufacturing.

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Required:(a) Evaluate the respective arguments put forward by K and by the

Production Director concerning the need for Hs full board to be forwardlooking rather than focussing on past performance.

(8 marks)

(b) Evaluate Ks argument that Hs board should review the companysstrategic direction at its half-yearly meetings.

(8 marks)

(c) Evaluate the Production Directors argument that K should not comment

on the manner in which H is run because of her background and lack ofexperience in a manufacturing company.

(9 marks)

(Total for Question Two = 25marks)

Section B continues on the next page

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Question Three

U is an administrative assistant in the treasury department of a multinational company. U waschecking some current market valuations when she noticed an anomaly in the rates associatedwith the USD/GBP exchange rates.

The spot rate for converting GBP to USD was 1.556 USD to the GBP. The three month forwardrate for converting USD back to GBP was 1.499 USD to the GBP.

Us bank was prepared to lend GBP at a fixed rate of 5.08% per annum. The bank was alsoprepared to offer a fixed rate for USD deposits of 5.12%.

U printed these figures out and spoke to the company treasurer because she believed that therewas an arbitrage opportunity. The treasurer agreed that Us figures indicated that an opportunityexisted, but said that the opportunity would have disappeared in the time that it had taken her towalk across the office.

U asked why the multinational company did not pay greater attention to the possibility ofarbitrage opportunities. The treasurer replied that Arbitrage is a full-time occupation and it is a

rather risky commercial venture. I am happy to leave the potential profits to the arbitrageurs whohave made it their business to trade in that way. The treasurer also stated that the companystreasury department is a cost centre and that he had no desire to make it into a profit centre.

Required:

(a) Calculate the potential gain that could have been made by the company if ithad borrowed GBP 10m in order to exploit the anomaly that she hadidentified.

(6 marks)

(b)

(i) Evaluate Us argument that the company could profit from this opportunity.

(4 marks)

(ii) Evaluate the treasurers argument that arbitrage is a risky commercialventure.

(8 marks)

(c) Evaluate the treasurers view that it is better for the companys treasurydepartment to operate as a cost centre rather than as a profit centre.

(7 marks)

(Total for Question Three = 25 marks)

Section B continues on page 18

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Question Four

F is a member of the internal audit department of D, a courier company. F has recentlycompleted a compliance audit of the extent to which the companys delivery vans are beingmaintained in accordance with the companys policy.

Each of Ds depots has a full-time mechanic. The companys policy is that the depot mechanic isrequired to check each vans fluid levels and give a road test on a monthly basis. The DepotManager is responsible for ensuring that every van has been checked in this manner.

One of Ds delivery drivers was recently involved in a road traffic accident. The police reportrelating to this accident indicates that the vans brakes had failed because of a leak in the brakepipe. The delivery driver has been charged by the police with an offence because it is illegal todrive a vehicle with defective brakes.

Ds Transport Manager has reviewed the vans maintenance log. The log shows that the depotmechanic had not inspected the van during the six weeks before the accident. The Head ofInternal Audit has reviewed Fs report and has noticed that although F had visited the depotshortly before the accident occurred he had reported that policies were being adhered to.

The Head of Internal Audit has asked F to explain why he gave a positive report when recordsprove that policies had not been adhered to. F explained that the Depot Manager had admittedthat the vans had not been inspected as frequently as company policy required because thedepot mechanic had been absent for two weeks because of ill health. There were no otherqualified mechanics available to carry out these inspections and the depots repair budget wasinsufficient to pay for the vans to be inspected by a third party. The Depot Manager had asked Fnot to note this omission in the audit report because it would lead to disciplinary action, whichwould harm the Depot Managers career. F agreed not to report the missed inspections providedthat the Depot Manager promised that all of the vans would be inspected as soon as possiblewhen the depot mechanic returned to work.

The Head of Internal Audit was dissatisfied with Fs behaviour alleging F had not acted in an

independent manner. F denies that accusation because he has no connection to the DepotManager or any of the depots other staff. Additionally, F has pointed out that the Depot Managercould easily have falsified the maintenance records to conceal the fact that the vans had not allbeen inspected on schedule and a negative internal audit report would simply encourage DepotManagers to falsify their records in future.

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Required:

(a) Evaluate the Head of Internal Audits assertion that F had not behaved in anindependent manner.

(7 marks)

(b) Discuss the implications of Fs behaviour for the governance of D.

(8 marks)

(c) The Head of Internal Audit wishes to conduct a thorough investigationinto the level and frequency of the inspection of the companys deliveryvans.

Recommend the tests that the internal audit department could conductto ensure that the depot mechanics are inspecting vehicles in

accordance with company policy. You should explain the purpose of thetests that you have recommended.(10 marks)

(Total for Question Four = 25 marks)

(Total for Section B = 50 marks)

End of Question Paper

Maths tables and formulae are on pages 21 to 24

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PRESENT VALUE TABLE

Present value of $1, that is ( ) nr +1 where r= interest rate; n= number of periods untilpayment or receipt.

Periods(n)

Interest rates (r)1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.9092 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.8263 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.7514 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.6835 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.6216 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.5647 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.5138 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.4679 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424

10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.38611 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.35012 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.31913 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.29014 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.26315 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.23916 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.21817 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.19818 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.18019 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.16420 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

Periods(n)

Interest rates (r)11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.8332 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.6943 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.5794 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.4825 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.4026 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.3357 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279

8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.2339 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194

10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.16211 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.13512 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.11213 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.09314 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.07815 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.06516 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.05417 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.04518 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.03819 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.03120 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026

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Cumulative present value of $1 per annum, Receivable or Payable at the end of each year for n

yearsr

rn+ )(11

Periods(n)

Interest rates (r)1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909

2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.7363 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.4874 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.1705 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791

6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.3557 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.8688 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.3359 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759

10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145

11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.49512 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.81413 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.10314 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.36715 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606

16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824

17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.02218 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.20119 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.36520 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514

Periods(n)

Interest rates (r)11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.8332 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.5283 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.1064 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.5895 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991

6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.3267 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.6058 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.8379 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031

10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192

11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.32712 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.43913 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.53314 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.61115 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675

16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.73017 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.77518 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.81219 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.84320 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

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Formulae

AnnuityPresent value of an annuity of 1 per annum receivable or payable for nyears,commencing in one year, discounted at r% per annum:

PV =

+

nrr ]1[

11

1

PerpetuityPresent value of 1 per annum, payable or receivable in perpetuity,commencing in one year, discounted at r% per annum:

PV =r

1

Growing PerpetuityPresent value of 1 per annum, receivable or payable, commencing in one year,growing in perpetuity at a constant rate of g% per annum, discounted at r% perannum:

PV =gr

1

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LIST OF VERBS USED IN THE QUESTION REQUIREMENTS

A list of the learning objectives and verbs that appear in the syllabus and in the question requirements foreach question in this paper.

It is important that you answer the question according to the definition of the verb.

LEARNING OBJECTIVE VERBS USED DEFINITION

Level 1 - KNOWLEDGE

What you are expected to know. List Make a list of

State Express, fully or clearly, the details/facts of

Define Give the exact meaning of

Level 2 - COMPREHENSION

What you are expected to understand. Describe Communicate the key features

Distinguish Highlight the differences between

Explain Make clear or intelligible/State the meaning or

purpose of

Identify Recognise, establish or select after

consideration

Illustrate Use an example to describe or explainsomething

Level 3 - APPLICATION

How you are expected to apply your knowledge. Apply

Calculate/compute

Put to practical use

Ascertain or reckon mathematically

Demonstrate Prove with certainty or to exhibit by

practical means

Prepare Make or get ready for use

Reconcile Make or prove consistent/compatible

Solve Find an answer to

Tabulate Arrange in a table

Level 4 - ANALYSIS

How are you expected to analyse the detail of

what you have learned.

Analyse

Categorise

Examine in detail the structure of

Place into a defined class or divisionCompare and contrast Show the similarities and/or differences

between

Construct Build up or compile

Discuss Examine in detail by argument

Interpret

Prioritise

Translate into intelligible or familiar terms

Place in order of priority or sequence for action

Produce Create or bring into existence

Level 5 - EVALUATION

How are you expected to use your learning to

evaluate, make decisions or recommendations.

Advise

Evaluate

Recommend

Counsel, inform or notify

Appraise or assess the value of

Advise on a course of action

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Performance Pillar

Strategic Level Paper

P3 Performance Strategy

November 2012

Wednesday Morning Session

cima p3 nov201

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