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Free CFA® CFA-Level-II Exam Braindumps (page: 22)

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PDF with 715 Questions

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 Exhibit 2, which of the following best describes the impact on Delicious's financial leverage in 2009 as compared to 2008?

  1. Financial leverage increased, but the true nature of the leverage decreased.
  2. Financial leverage increased, and the true nature of the leverage increased.
  3. Financial leverage and the true nature of the leverage were unchanged.

Answer(s): A

Explanation:

Delicious's financial leverage ratio was 1.8 (54,753 average assets / 29,983 average equity) for 2009 and was 1.7 for 2008 (49,354 average assets / 28,738 average equity). Although leverage was higher, the nature of the true leverage was lower. This is because the increasing customer advances (unearned revenue) will not require an outflow of cash in the future and are, thus, less onerous than Delicious's other liabilities. (Study Session 7, LOS 26.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.


The data found in Exhibit 3 indicates that Delicious may be over-allocating resources to the:

  1. Europe segment.
  2. Mexico segment.
  3. Europe segment and the Mexico segment.

Answer(s): B

Explanation:

As indicated below, the Mexico segment has the lowest EBIT margin, yet it has the highest proportional capital expenditures to proportional assets ratio. Thus, Delicious may be ov er- allocating resources to the Mexico segment.



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.




If Delicious were to treat the operating lease as a finance lease, its interest coverage ratio for 2009 would be closest to:

  1. 16.9.
  2. 17.8.
  3. 19.0.

Answer(s): B

Explanation:

A finance lease is reported on the balance sheet as an asset and as a liability. In the income statement, the leased asset is depreciated and interest expense is recognized on the liability. The lease adjustment involves adding the rental payment back to EBIT and then subtracting the implied depreciation expense. Next, the implied interest expense for the lease is added to reported interest.



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 Exhibit 4, Delicious's implied P/E multiple without regard to its U.S. associate is closest to:

  1. 14.0.
  2. 14.8.
  3. 15.1.

Answer(s): B

Explanation:

Delicious's implied value without its U.S. associate is €90,736 [€97,525 Delicious market cap -€6,739 pro-rata share of associates market cap ($32,330 x 30% x €0.70 current exchange rate)].
Delicious's net income without associate is €6,147 (€6,501 net income - €354 pro-rata share of income from associate).
Implied P/E = 14.8 (€90,736 Delicious implied value without associate / €6,147 Delicious net income without associate). (Study Session 7, LOS 26.e)



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