EMT Practice Test

1. Question Content...

---

Question1: 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

Question2: You have received the following email from Peter Sorchi, CEO:
From: Peter Sorchi, Chief Executive Officer
To: Senior Finance Manager
Fwd: Tax avoidance article
Hi,
I am forwarding you an email from a journalist. It came in via our press office, who passed it up the management chain and it ended up in my inbox.
Some of the basic facts stated in the draft article are correct:
* We do have arrangements in place with leading tax advisers for referrals of potential clients. We pay a commission for all such referrals, which the tax adviser is required to disclose to the client.
* Barry Crauder has been one of our largest clients for many years. He owns significant forested land and we manage that in return for our usual fee.
* We do not offer tax advice, or promote forestry as a tax-efficient investment. We simply offer a forestry management service as a paid service.
I would like you to address the following issues and I need your reply as a matter of some urgency.
Could we be accused of behaving unethically with respect to this aspect of our forestry management service?
Please draft a response that we can submit to Sonia Jones. Please also give an explanation for the Board as to how you will address the fact that the draft newspaper article clearly makes us appear to be unethical. We will consider your draft and related comments at a meeting this afternoon, before submitting anything.
Peter
To: Press Office, Wodd
From: Sonia Jones, reporter, Daily Gazette
Re: Tax avoidance article
I am seeking a response from Wodd concerning the activities of the celebrity Barry Crauder. We have established that Mr Crauder has been investing heavily in forestry in order to avoid paying tax on the considerable wealth that he has amassed from his show business career.
We believe that a significant part of this story is the relationship between forestry companies such as Wodd and professional tax advisers. When researching this story I posed as a wealthy investor and approached several firms that specialise in offering tax avoidance advice to high net worth individuals. Four of the firms whom I approached recommended a forestry scheme and specifically recommended Wodd to manage it for me. I believe that Wodd has a close relationship with these firms and possibly others.
I have attached a draft of my story. I have sufficient evidence to support every fact stated. I am writing in order to give Wodd the opportunity to respond if it wishes to do so, although the story will run regardless. I will require your comment within 48 hours, otherwise, I will run the story as it stands.
Sonia Jones
Chief reporter, Daily Gazette

Question3: A further eight weeks have passed since the discussion concerning Wodd's creation of an accredited Forest Certification Service.
Wodd's Chairman has asked you to a meeting:
"I thought that we had a lucky escape over the Barry Crauder story from a recent news article, but the Government is considering modifying the tax arrangements associated with forestry. Professional forestry companies such as Wodd will continue to pay no tax on forestry profits, but private individuals such as Mr Crauder will be taxed on profits just as they would for any other business. The Government is taking this action because public opinion is against granting generous tax relief to wealthy individuals.
For the moment, this is all highly secret. The minister responsible for forestry has spoken to the chairmen of all of the major forestry companies on the basis that each gives a personal guarantee to respect the Government's confidence. The minister has done so because she is concerned that stock markets will panic when the news of the tax changes are announced next week. If the shareholders incorrectly believe that we will lose the tax shield on our profits then the share price will drop like a stone. We will be able to announce that we are aware of the changes and that we will not be taxed differently because of them.
I have spoken to the Board about this, making them promise not to repeat any of this information. We have called in and briefed the key analysts who advise the main institutional investors in Marland on the forestry industry.
As things stand, we can expect a lot of the wealthy individuals who own forests to divest themselves as soon as they discover that there are no more tax incentives. That will have significant implications for Wodd, both directly and indirectly.
The Board believes that the markets will overreact when the tax changes are first announced and that we will be unable to do much to manage that. One suggestion that has been put forward is that we should increase the dividend slightly as a signal that we are confident in the future strength of the industry. I suspect that the executive directors are just a little too concerned with the fact that they all have stock options that can only be exercised on a date that falls just after the government is due to announce its intentions on tax.
I need your thoughts in order to have an independent viewpoint from that voiced by the Board:
* What effect will the tax changes have on our business?
* Do you agree that briefing the analysts will mitigate the risk of our share price overreacting when the tax changes are announced?
* Will the additional dividend payment help to maintain the share price?
* Is granting executive stock options always a sound basis for aligning the interests of the executive directors and the shareholders?"

Question4: 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."

Question5: The Director of Finance, William Seaton, has invited you into his office.
"This will come as a bit of a shock, but the Board has decided that it would be in our best interests to relocate our Head Office from Kayland to the Middle East. We have interests there, including a regional office, already. We know that the oil industry is welcome and there are several governments which are very open to such foreign direct investment from the West.
Nothing has been decided for certain, but there are compelling tax advantages to us relocating. We would also be subject to slightly less restrictive legal requirements. We can retain our listing on the Kayland stock exchange, albeit as a foreign company.
Things are very much under consideration at the moment, so please don't tell anybody about this conversation.
I want to check that I have thought of everything at the strategic level before we make an irreversible decision to move. I need you to write me a report on the following:
* What are the strategic implications of moving our Head Office from Europe to the Middle East?
* What are the strategic risks that might arise and how might we deal with them?
I need to have your thoughts soon because the Board is holding a special meeting this afternoon."

Question6: From: Martin Wills, Head Geologist
To: William Seaton, Director of Finance
Subject: Reserves
Hi William,
I have reviewed the situation with respect to our "probable" or "2P" reserves, as disclosed in our latest annual report. I am sorry to say that we have to downgrade our figures with respect to reserves. I am recommending that all extraction activities cease for the foreseeable future on the North Atlantic and South Atlantic fields and that the proved reserves be downgraded from proved to probable.
I have to stress that this is not attributable to any past error on the part of the geologists. The world oil price has been depressed and the discovery of large deposits of shale oil in the USA suggests that the oil price will not recover for some time. That means that some oil wells that were commercially viable this time last year are no longer worth processing.
The oil remains under the rock and I have no doubt that we will restore operations in the long term.
We are by no means the only oil company to have been forced to take this action.
The one piece of good news is that the financial statements for the year ended 31 December 2014 have already been published. My understanding is that we do not have to withdraw them, so unless you put an advertisement in the press, we can carry on quietly trying to sort this mess out.
I have my best people working on ways to extract oil from our wells more efficiently, so we may be able to increase production over the next year or so.
Martin

Question7: 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.

Question8: 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

Question9: Twelve hours have passed since you received the telephone call concerning the oil spillage.
You receive the following telephone call from William Seaton, Director of Finance:
"The press has got a hold of the story about the oil leak. Our share price has taken a major hit. Indeed, Slide's market capitalisation has fallen by a third since the stock exchange opened for business. There is a lot of loose talk in the press about the knock-on effect of this crisis for Slide. It has not escaped anybody's notice that there are news teams showing injured wildlife. There is also a great deal of footage being broadcast on the other sites around the world where we are revitalising oil wells using the same technology that was in use at AZ40.
Our experts have only just arrived at the spillage site. While they were on the corporate jet they emailed their initial thoughts, based on their understanding of what went wrong. Our engineers anticipate a major operation to block the leak by pumping cement into the bore hole at a low pressure. This will be expensive, but the cost will be less than one tenth of the reduction in our market capitalisation.
I need an email from you:
* Firstly, I need a clear explanation of the key risks that Slide now faces because of this crisis. I am only interested in those with a high risk and high consequence and I need you to justify those classifications because the Board will need to prioritise its responses.
* Secondly, two related issues: I need you to explain why Slide's share price has fallen to such an extent AND to recommend, with reasons, whether we should release our costings of the repair scheme at this time.
It goes without saying that I need this urgently."

Question10: Daily Gazette
Celebrities flock to release tax returns
Comedian Madd Wilkins is the latest celebrity to post his tax returns online. The comedian earned M$1,600,000 from his sell-out tour and from the sale of DVDs. He paid tax of M$608,000 on that income. The comedian quipped, "there's nothing funny about paying tax, but then there's nothing very funny about my act either so it's only fair that I should pay the full whack".
Public concern about the tax benefits enjoyed by wealthy celebrities using artificial schemes such as investing in forestry to minimise their tax bills has led to closing tax loopholes topping the political agend a. Many wealthy individuals have volunteered their tax files in order to reassure the public that they are not benefitting from such schemes.

Question11: The following email has just arrived:
From: William Seaton, Director of Finance
To: Finance Manager
Subject: News article
Hi,
My Secretary has drawn my attention to the attached newspaper clipping. I have been reading comments like this since Fouce Oil acquired its interest in 2010. We briefed the press at the time and made it clear that we would not be commenting further on our relationship with it unless it changed materially. Nothing has happened since then to make us change our mind on that.
The Board has asked me to compile a report on the following:
* How might the presence of Fouce Oil, as a 25% shareholder, affect our decision making as a Board of Directors? Perhaps, surprisingly, we have never had a formal discussion of this matter.
* How will Fouce Oil's stake in Slide affect our share price?
I would like you to email me your thoughts on these points so that I can have as long as possible to think about what I will say to the Board.
Thanks
William
The newspaper clipping can be found by clicking on the Reference Materials button.

Question12: From: Abdhulla Al- Waihabi, Regional Manager - Middle East - Slide
To: William Seaton, Director of Finance
Subject: Press article
Hi William,
I have just had a telephone call from a journalist at Business News to ask for a comment on a story that it plans to run. As you know, we purchased oil wells in the AZ40 field last year in order to bring them back to full production. We got the wells for a good price because the previous owner was struggling to maintain oil pressure and it appeared that the recoverable reserves in that field were close to exhaustion. Our experts worked out a plan to drill a hole and pump water into the well to force more oil to the surface. That is a standard industry technique. Our geologists are the best in the industry and so we are better than most at bringing wells back on stream.
It now appears that we are being blamed for an environmental catastrophe. Our pumping station is only one kilometre from the sea and there are reports of oil coming to the surface along the coast close to where we are operating. We have only just started operations and there are fears that we have ruptured a rock formation with our high pressure pumping.
I have ordered an immediate halt to all pumping activity, but the oil could continue to bubble up for years. The coastal area has some important coral reefs and there are fishermen who depend on shellfish that can be found there.
I told the journalist that she would have to wait for a response from Slide's Board. Business News is a European newspaper, so any comment from you will carry more weight anyway.
I am sorry to be the bearer of such bad news.
Abdhulla

Question13: 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."

Question14: SIMULATION
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

Question15: A month has passed since you submitted the report requested by William Seaton, Director of Finance on the Board's proposals.
You have received the following email:
From: William Seaton, Director of Finance
To: Finance Manager
Subject: Shale oil
Hi,
One of the geologists made a presentation to the Board, proposing that we investigate the extraction of shale oil deposits. I have attached the slides that were used as the basis for this presentation.
I need you to work on a response to this document:
* Firstly, what risks do you envisage in our entry to the shale oil business?
* Secondly, what do you regard as the key factors that we should consider when deciding on proceeding with this proposal? Please justify your selection.
* Thirdly, what factors should we take into account when deciding on which country or countries to commence this side of the business?
* Finally, what are the challenges in creating a team of technical staff to lead our efforts in this area?
William
The presentation slides can be found by clicking on the Reference Materials button.

Question16: 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

Question17: Daily Gazette
Draft story for comment
The singer, the forester and the tax adviser
Popular singer Barry Crauder is regarded as one of our more financially-aware personalities. He works hard, releasing at least one new album every year and serving as a judge on a popular talent show. He has a reputation for investing this income wisely, choosing to save for his future rather than squandering on the trappings of the show business lifestyle.
Crauder's popularity was severely damaged when it emerged that he pays little or no tax on the investment income derived from his portfolio of investments. That is because he has used one of the few remaining tax loopholes, namely investment in forestry. He owns significant areas of forestry in the far North of Marland. We estimate his earnings from those investments to exceed M$800,000 every year and yet he has not paid a single Cent in tax on that income since he first invested in forestry ten years ago. In contrast, a typical fan who earns the national average wage of M$28,000 every year will pay approximately M$7,000 in tax.
So, could we all invest in forestry? Well, not unless we can afford it. I posed as a wealthy business entrepreneur and approached several leading tax advisers. Most were interested in helping me to invest a seven figure sum to avoid tax, but warned that saving tax could be expensive in terms of fees and commissions.
Four firms recommended forestry as the ideal investment. All recommended Wodd, with whom all four claimed to conduct "significant business". They said that a typical client would give Wodd a bank draft and leave the purchase and subsequent management to Wodd in return for a fee. Most clients had never even seen the forests that they own and none ever need to make a management decision concerning the growth or sale of timber.
Sadly, investing in forestry is a rich person's pursuit. I was warned that companies such as Wodd are unlikely to entertain a potential client whose initial investment does not run into the tens of millions of M$.
Please address any response to Sonia Jones, care of the Daily Gazette news desk, as quickly as possible.

Question18: Six months have passed since you briefed William Seaton, Director of Finance on the relationship between Slide and Fouce Oil.
You have been called into William Seaton's office:
"We had a visit from the Chief Executive Officer of Fouce Oil yesterday. We had not received any prior notice of the purpose of the visit and assumed that he simply wished to make a courtesy call while he was visiting Fouce Oil's subsidiary in this country. Instead, he came to initiate discussions over a strategy of collaboration on oil exploration.
Rather than explain things myself, please read the memorandum of understanding that he has asked us to sign. It is self-explanatory.
Once you have read the memorandum, I would like you to email me your thoughts on the following:
* The suitability of this proposal for Slide.
* The likelihood that Fouce Oil's strategic interests will clash with our own.
* The strategic risks that are likely to arise because of this arrangement.
* The manner in which this strategic relationship should be communicated to the stock market.
I realise that this is a challenging request, but I need your response quickly because we need to respond to Fouce Oil." The Memorandum of Understanding can be found by clicking on the Reference Materials button.

Question19: 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:

Question20: 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

Question21: 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: