CS3 Strategic Case Study Exam 2021 Questions and Answers

Questions 4

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.”

Options:

Buy Now

Questions 5

A week later, Romuald Marek stops by your workspace and hands you a document.

The Board minute extract from Romuald can be viewed by clicking the Reference Material button above.

Reference Material

Board minutes extract: proposal to profit from ongoing strength of NS

Anna Obalowu Sole, Chief Operating Officer, reported that the strong NS was helping generate revenues from fuel sales. Discussion followed as to whether the strong N$ was likely to persist and whether a strong N$ benefits Arrfield overall.

Markus Jokela. Chief Executive Officer, stated that the Board should develop contingency plans that could be implemented if it seemed likely that the strong N$ would persist. In particular. Arrfield need not renew the contracts that permit aviation fuel suppliers to operate from its airports. Arrfield would then be free to create its own fuel sale business, buying fuel in bulk to replenish the storage tanks at each of its airports in Norland and then selling it directly to airlines He stated that this would almost certainly enhance Arrfield's share price

Romuald Marek reminded the Board that four of Arrfield's six airports are located in Norland and that those airports charge for aeronautical and non-aeronautical services in N$.

Options:

Buy Now

Answer:

See the answer below in explanation.

Explanation:

Requirement : 1

A strong domestic currency in the Aviation business makes the business more profitable. It is evident form interest rate parity that the exchange rate of currency appreciate as the interest rate fall. The interest rate of the Norland is lower than other countries will make the N$ appreciated as compare to the other countries.

A strong domestic currency is not always good for the Aviation business. It intrinsically involves the use of foreign currency on regular basis. A strong NS may decrease the revenues of the Arrfield because it will become costly for the airlines from abroad. The airlines may find airport of other nearby countries with cheaper currency which will allow them cost savings with the use of cheaper currency.

Requirement : 2

By starting aviation fail business by the Arrfield could increase the share price.

Suitability:

The aviation fuel business suits to Arrfield because of three reasons. 1- It will be taken by the market as backward integration. This will reduce the risk of the Arrfield significantly. 2- The companies in Norland with a strong currency are able to import cheaper fuel and offering discount to airlines. This can be profitable business. 3- The criticism by the environmentalists may be managed by taking corrective actions i.e. selling fuel at full price.

The Airfield could club the fuel charges into the landing, take off and terminal usage fee, this could ease the process for the airlines could make the airports more popular. The Arrfield could also manage the fuel inventory as per requirements because they have the schedule of the flights.

Acceptability:

The shareholders of the Arrfield will accept the proposal as it seems profitable and it may increase the shar price of the Arrfield share because of the material information regarding starting a new business line will give positive feed sign. The reputation risk arise from article a week before regarding selling cheaper fuel may also be mitigated by taking over the business and corrective actions may be taken.

The matter will not be appreciated by the companies they would wish to continue with Arrfield. They must also be satisfied on termination of contract.

Feasibility:

Arrfield have 4 major airports (three hub and a spoke) in Norland. The hub airports are big and planes are fueled with the underground pipelines and workforce work in close connection with the fuel companies. The Arrfield have the infrastructure to start its business of aviation fuel.

Questions 6

Hello

I have attached a news article

Arrfield does not set the price for aviation fuel sold at our airports, but we do receive a percentage of the revenues earned by the fuel companies.

I need your help to prepare for a Board meeting to discuss this matter Please write a paper covering the following

* Firstly, explain the impact that the criticisms voiced by the environmental campaigners will have on the frequent PESTEL analysis that Arrfield's Board conducts.

[sub-task (a) = 34%

* Secondly, evaluate the commercial logic of Arrfield's strategy of basing charges for non-aeronautical services (such as fuel sales and retail activities) on percentages of the revenues generated by the companies that operate at its airports

[sub-task (b) = 33%)

* Thirdly, recommend with reasons whether Arrfield should attempt to justify strategic decisions to its shareholders when the commercial logic of those decisions is not immediately obvious

[sub-task (c) = 33%}

Thanks

Romuald Marek

Chief Finance Officer

Options:

Buy Now

Answer:

See the answer below in explanation.

Explanation:

Requirement 1

The criticism from the environmental campaigns for sale of cheap fuel at the Arrfield airports is not a good sign but the prices of the fuel are not set by the Arrfield. In most of the countries the fuel prince are regulated through Oil and Gas regulatory authorities. As the Arrfield airports are providing the facilities to airlines to refill fuel at the airport which is necessary for the flying of the plane on commission bases, it contribute a significant portion of profit of the Arrfield.

The environmental campaigners criticism is on the usage use of fuel which cause carbon emissions. The Govt, of the Norland may set the price of the fuel in Norland and regulate the prices of the fuel in Norland. After the criticism Govt, of Norland may think to not allowing the fuel companies to pass the cheap fuel import to the airlines. This may be hostile of the Arrfiled business. Many airline may choose the Norland for the flight operation due to gaining advantage of cheaper fuel refill.

As the airlines are buying more fuel which makes the plane heavier and burn more fuel which harm to the environment is a great concern. This could lead to legal and environmental litigation and penalties. The reputation risk is also here if corrective actions are not taken by Arrfield.

Requirement 2

As the Airfield also rely heavily on the non-aeronautical revenues to make profits and the it increase from a substantial percentage in 2020 as to the preceding year. The fuel companies operate in Arrfied airports which is intrinsic in the airport business. It will be difficult for the Arrfield to provide the fuel by itself. It is worthwhile that the Arrfieid earning commission without involving the fuel operations.

As the Norland is being liked by the airlines for refueling its plane is good for the Arrfield to make profit. Arrfield earn commission as much as the airline buy fuel from fuel companies. But by decreasing the price of the fuel it is also worth mentioning that the Arrfield commission is also remains at lower side.

There are three elements in the scenario: 1- Higher sale higher commission. 2- Sale at lower price lower commission. 3-Reputational and environmental risk involved.

Requirement 3

The shareholders are major stakeholders of the company. They are key players have high amount of power and high level of interest. The Arrfield must communicate true affairs of the business to its shareholders. If the commercial logic of decision are not obvious then the poor understanding of the affairs may lead to chaos. The managers are representative of the shareholders and should do everything in the best interest of the shareholders. If they will make the decisions which are not logically understandable then, the shareholders may lose their trust in the management.

The shareholders must not be justified to the shareholder if they are not commercially valuable. Whether or not the decisions are profitable these may be communicated to shareholders which represent true picture of the decisions breach of CIMA ethical principles.

Exam Code: CS3

Exam Name: Strategic Case Study Exam 2021

Last Update: May 1, 2024

Questions: 45