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Free CFA® CFA-Level-II Exam Braindumps (page: 21)

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PDF with 715 Questions

Viper Motor Company, a publicly traded automobile manufacturer located in Detroit, Michigan, periodically invests its excess cash in low-risk fixed income securities. At the end of 2009, Viper's investment portfolio consisted of two separate bond investments: Pinto Corporation and Vega Incorporated.

On January 2, 2009, Viper purchased $10 million of Pinto's 4% annual coupon bonds at 92% of par. The bonds were priced to yield 5%. Viper intends to hold the bonds to maturity. At the end of 2009, the bonds had a fair value of $9.6 million.

On July I, 2009, Viper purchased $7 million of Vega's 5% semi-annual coupon mortgage bonds at par. The bonds mature in 20 years. At the end of 2009, the market rate of interest for similar bonds was 4%. Viper intends to sell the securities in the near term in order to profit from expected interest rate declines.
Neither of the bond investments was sold by Viper in 2009.

On January 1,2010, Viper purchased a 60% controlling interest in Gremlin Corporation for $900 million. Viper paid for the acquisition with shares of its common stock.
Exhibit 1 contains Viper's and Gremlin's pre-acquisition balance sheet data.

Exhibit 2 contains selected information from Viper's financial statement footnotes.



According to U.S. GAAP, Viper's long-term debt-to-equity ratio, calculated immediately after the acquisition, is closest to:

  1. 1.07.
  2. ] .10.
  3. 1.12.

Answer(s): B

Explanation:

Viper's post-acquisition LTD is $8,000 million [7,700 million BV of Viper + 300 million fair value (FV) of Gremlin debt]. Viper's post-acquisition equity is equal to $7,300 million (5,800 million Viper pre-acquisition equity + 900 million FV of shares used to acquire Gremlin + 600 million non-controlling interest). Under U.S. GAAP, the noncontrolling interest is based on the full goodwill method (1,500 million FV of Gremlin x 40% non-controlling interest). Thus, the long- term debt-to-equity ratio is 1.10 (8,000 million LTD / 7,300 million equity). (Study Session 5, LOS21.b,c)



Viper Motor Company, a publicly traded automobile manufacturer located in Detroit, Michigan, periodically invests its excess cash in low-risk fixed income securities. At the end of 2009, Viper's investment portfolio consisted of two separate bond investments: Pinto Corporation and Vega Incorporated.

On January 2, 2009, Viper purchased $10 million of Pinto's 4% annual coupon bonds at 92% of par. The bonds were priced to yield 5%. Viper intends to hold the bonds to maturity. At the end of 2009, the bonds had a fair value of $9.6 million.

On July I, 2009, Viper purchased $7 million of Vega's 5% semi-annual coupon mortgage bonds at par. The bonds mature in 20 years. At the end of 2009, the market rate of interest for similar bonds was 4%. Viper intends to sell the securities in the near term in order to profit from expected interest rate declines.
Neither of the bond investments was sold by Viper in 2009.

On January 1,2010, Viper purchased a 60% controlling interest in Gremlin Corporation for $900 million. Viper paid for the acquisition with shares of its common stock.
Exhibit 1 contains Viper's and Gremlin's pre-acquisition balance sheet data.

Exhibit 2 contains selected information from Viper's financial statement footnotes.



Using only the information contained in Exhibit 2, which of the following statements is most correct when presenting Viper's consolidated income statement for the year ended 2010?

  1. An impairment loss of $5 million should be recognized under IFRS.
  2. An impairment loss of $275 million should be recognized under U.S. GAAP.
  3. No impairment loss is recognized under U.S. GAAP or IFRS.

Answer(s): C

Explanation:

According to U.S. GAAP, the goodwill is not impaired since the $1,475 million fair value of Gremlin exceeds the $1,425 million carrying value. Thus, no impairment loss is recognized. Under IFRS, no impairment loss is recognized since the $1,430 million recoverable amount exceeds the $1,425 million carrying value. (Study Session 5, LOS 21.b)



Delicious Candy Company (Delicious) is a leading manufacturer and distributor of quality confectionery products throughout Europe and Mexico. Delicious is a publicly-traded firm located in Italy and has been in business over 60 years.

Caleb Scott, an equity analyst with a large pension fund, has been asked to complete a comprehensive analysis of Delicious in order to evaluate the possibility of a future investment.
Scott compiles the selected financial data found in Exhibit 1 and learns that Delicious owns a 30% equity interest in a supplier located in the United States. Delicious uses the equity method to account for its investment in the U.S. associate.



Scott reads the Delicious's revenue recognition footnote found in Exhibit 2.

Exhibit 2: Revenue Recognition Footnote ________________in millions_________________________________________ Revenue is recognized, net of returns and allowances, when the goods are shipped to customers and collectability is assured. Several customers remit payment before delivery in order to receive additional discounts. Delicious reports these amounts as unearned revenue until the goods are shipped. Unearned revenue was €7,201 at the end of 2009 and €5,514 at the end of 2008.

Delicious operates two geographic segments: Europe and Mexico. Selected financial information for each segment is found in Exhibit 3.



At the beginning of 2009, Delicious entered into an operating lease for manufacturing equipment. At inception, the present value of the lease payments, discounted at an interest rate of 10%, was 6300 million. The lease term is six years and the annual payment is 669 million. Similar equipment owned by Delicious is depreciated using the straight-line method and no residual values are assumed.
Scott gathers the information in Exhibit 4 to determine the implied "stand-alone" value of Delicious without regard to the value of its U.S. associate.



When applying the financial analysis framework to Delicious, which of the following is the best example of an input Scott should use when establishing the purpose and context of the analysis?

  1. The audited financial statements of Delicious prepared in conformance with either U.S. Generally Accepted Accounting Principles or International Financial Reporting Standards.
  2. Ratio analysis adjusted for differences between U.S. accounting standards and international
    accounting standards.
  3. Review of the pension fund's guidelines related to developing the specific work product.

Answer(s): C

Explanation:

The institutional guidelines related to developing the specific work product is an input source in the first phase (defining the purpose and context of the analysis). Audited financial statements are an example of an input in the data collection phase. Ratio analysis is an example of the output from the data processing phase. (Study Session 7, LOS 26.a)



Delicious Candy Company (Delicious) is a leading manufacturer and distributor of quality confectionery products throughout Europe and Mexico. Delicious is a publicly-traded firm located in Italy and has been in business over 60 years.

Caleb Scott, an equity analyst with a large pension fund, has been asked to complete a comprehensive analysis of Delicious in order to evaluate the possibility of a future investment.

Scott compiles the selected financial data found in Exhibit 1 and learns that Delicious owns a 30% equity interest in a supplier located in the United States. Delicious uses the equity method to account for its investment in the U.S. associate.


Scott reads the Delicious's revenue recognition footnote found in Exhibit 2.

Exhibit 2: Revenue Recognition Footnote
_____________________________in millions__________________Revenue is recognized, net of returns and allowances, when the goods are shipped to customers and collectability is assured. Several customers remit payment before delivery in order to receive additional discounts. Delicious reports these amounts as unearned revenue until the goods are shipped. Unearned revenue was €7,201 at the end of 2009 and €5,514 at the end of 2008.

Delicious operates two geographic segments: Europe and Mexico. Selected financial information for each segment is found in Exhibit 3.



At the beginning of 2009, Delicious entered into an operating lease for manufacturing equipment. At inception, the present value of the lease payments, discounted at an interest rate of 10%, was 6300 million. The lease term is six years and the annual payment is 669 million. Similar equipment owned by Delicious is depreciated using the straight-line method and no residual values are assumed.
Scott gathers the information in Exhibit 4 to determine the implied "stand-alone" value of Delicious without regard to the value of its U.S. associate.



Using the data found in Exhibit 1 and the extended DuPont equation, which of the following best describes the impact on Delicious's return on equity (ROE) for 2009 of eliminating the investment in the U.S. associate?

  1. Adjusted ROE is lower than unadjusted ROE.
  2. Adjusted ROE is higher than unadjusted ROE.
  3. The investment in the U.S. associate has no impact on adjusted ROE for 2009.

Answer(s): B

Explanation:

Do not automatically assume that eliminating the associate earnings will result in lower ROE. In this case, unadjusted ROE for 2009 was 21.4%, and adjusted ROE was 22.1%. Note that financial leverage (assets / equity) is not adjusted, as no information is provided about how the investment in the associate was financed.



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