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Free CFA® CFA-Level-II Exam Braindumps (page: 24)

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Voyager Inc., a primarily internet-based media company, is buying The Daily, a media company with exposure to newspapers, television, and the internet.

Company Descriptions
Voyager Inc. is organized into two segments: Internet and Newspaper Publishing. The internet segment operates Web sites that offer news, entertainment, and advertising content in text and video format. The internet segment represents 75% of the company's total revenues. The newspaper publishing segment publishes 10 daily newspapers. The newspaper publishing segment represents 25% of the company's total revenues.

The Daily is organized into three segments: Newspaper Publishing (60% of revenues), Broadcasting (35% of revenues), and Internet (5% of revenues). The newspaper publishing segment publishes 101 daily newspapers. The Broadcasting segment owns and operates 25 television stations. The Internet segment consists of an internet advertising service. The Daily's newspaper publishing and broadcasting segments cover the twenty largest markets in the United States.

Voyager's acquisition of The Daily is The company's second major acquisition in its history. The previous acquisition was at the height of the merger boom in the year 2000. Voyager purchased the Dragon Company at a premium to net asset value, thereby doubling the company's size. Voyager used the pooling method to account for the acquisition of Dragon; however, because of FASB changes to the Business Combination Standard, Voyager will use the acquisition method to account for the Daily acquisition.

Voyager has made an all-cash offer of $45 per share to acquire The Daily. Wall Street is skeptical about the merger. While Voyager has been growing its revenues by 40% per year, The Daily's revenue growth has been less than 2% per year. Michael Renner. the CFO of Voyager, defends the acquisition by stating that The Daily has accumulated a large amount of tax losses and that the combined company can benefit by immediately increasing net income after the merger. In addition, Renner states that the New Voyager will eliminate the inefficiencies of the internet operations and thereby boost future earnings. Renner believes that the merged companies will have a value of $17.5 billion.

In the past, The Daily's management has publicly stated its opposition to merging with any company, a position management still maintains. As a result of this situation, Voyager submitted their merger proposal directly to The Daily's board of directors, while the firm's CEO was on vacation. Upon returning from vacation, The Daily's CEO issued a public statement claiming that the proposed merger was unacceptable under any circumstances.

The management of The Daily is not pleased with the $45 per share offering price. Which of the following is the most likely takeover defense The Daily would consider in an effort to stop the acquisition?

  1. Immediately amend The Daily by-laws to establish a staggered board.
  2. File suit against Voyager for antitrust violations.
  3. Restrict the voting rights of shareholders owning more than 10% of The Daily stock.

Answer(s): B

Explanation:

The legal action based on antitrust is the only choice given that is a post-offer defense. Staggered boards, restricted voting rights, and poison puts are all pre-offer defenses that would not be possible after the tender offer has been made. (Study Session 9, LOS 31.f)



Voyager Inc., a primarily internet-based media company, is buying The Daily, a media company with exposure to newspapers, television, and the internet.

Company Descriptions
Voyager Inc. is organized into two segments: Internet and Newspaper Publishing. The internet segment operates Web sites that offer news, entertainment, and advertising content in text and video format. The internet segment represents 75% of the company's total revenues. The newspaper publishing segment publishes 10 daily newspapers. The newspaper publishing segment represents 25% of the company's total revenues.

The Daily is organized into three segments: Newspaper Publishing (60% of revenues), Broadcasting (35% of revenues), and Internet (5% of revenues). The newspaper publishing segment publishes 101 daily newspapers. The Broadcasting segment owns and operates 25 television stations. The Internet segment consists of an internet advertising service. The Daily's newspaper publishing and broadcasting segments cover the twenty largest markets in the United States.

Voyager's acquisition of The Daily is The company's second major acquisition in its history. The previous acquisition was at the height of the merger boom in the year 2000. Voyager purchased the Dragon Company at a premium to net asset value, thereby doubling the company's size. Voyager used the pooling method to account for the acquisition of Dragon; however, because of FASB changes to the Business Combination Standard, Voyager will use the acquisition method to account for the Daily acquisition.

Voyager has made an all-cash offer of $45 per share to acquire The Daily. Wall Street is skeptical about the merger. While Voyager has been growing its revenues by 40% per year, The Daily's revenue growth has been less than 2% per year. Michael Renner. the CFO of Voyager, defends the acquisition by stating that The Daily has accumulated a large amount of tax losses and that the combined company can benefit by immediately increasing net income after the merger. In addition, Renner states that the New Voyager will eliminate the inefficiencies of the internet operations and thereby boost future earnings. Renner believes that the merged companies will have a value of $17.5 billion.

In the past, The Daily's management has publicly stated its opposition to merging with any company, a position management still maintains. As a result of this situation, Voyager submitted their merger proposal directly to The Daily's board of directors, while the firm's CEO was on vacation. Upon returning from vacation, The Daily's CEO issued a public statement claiming that the proposed merger was unacceptable under any circumstances.
Which of the following best characterizes Voyager's proposal to merge with The Daily?

  1. Bear Hug.
  2. Proxy Fight.
  3. White Knight.

Answer(s): A

Explanation:

A hostile merger occurs when the management of a merger target is opposed to the proposed merger. In such a situation, the acquiring company may initiate a bear hug in which the merger proposal is delivered directly to the board of directors of the target company. Voyager has initiated a bear hug in the hopes of gaining board support for the proposed merger before management can react to the proposal. If the bear hug is unsuccessful, the acquirer may appeal diiectly to the target's shareholders through a tender offer in which the acquirer offers to buy shares directly from shareholders or through a proxy fight in which a proxy solicitation is used to convince shareholders to elect a board of directors chosen by the acquirer. The board of directors would then replace the target's management and allow the merger to move forward. A white knight is a takeover defense, not a type of merger. (Study Session 9, LOS 31.e)



Gary Smith, CFA, has been hired lo analyze a specialty tool and machinery manufacturer, Whitmore Corporation (WMC). WMC is a leading producer of specialty machinery in the United States. At the end of 2006, WMC purchased York Tool Company (YTC), an Australian firm in a similar line of business. YTC has partially integrated its marketing functions within WMC but still maintains control of its operations and secures its own financing. Following is a summary of the income statement and balance sheet for YTC (in millions of Australian dollars - AUD) for the past three years as well as exchange rate data over the same period.








Smith has discovered that WMC has a small subsidiary in Ukraine. The Subsidiary follows IAS accounting rules and uses FIFO inventory accounting. The Ukrainian subsidiary was acquired ten years ago and has been fully integrated into WMC's operations. WMC obtains funding for the subsidiary whenever the company finds profitable investments within Ukraine or surrounding countries. According to forecasts from economists, the Ukrainian currency is expected to depreciate relative to the U.S. dollar over the next few years. Local currency prices are forecasted to remain stable, however.
One of the managers at WMC asks Smith to analyze a third subsidiary located in India. The manager has explained that real interest rates in India over the last three years have been 2.00%, 2.50%, and 3.00%, respectively, while nominal interest rates have been 34.64%, 29.15%, and 25.66%, respectively. Smith requests more time to analyze the Indian subsidiary.

If WMC uses the temporal method, YTC's net monetary liabilities leave WMC exposed to loss in the event of:

  1. currency (AUD) depreciation.
  2. currency (AUD) appreciation.
  3. either currency depreciation or currency appreciation.

Answer(s): B

Explanation:

Under che temporal method, the nonmonetary assets and liabilities are remeasured at historical rates. Thus, only the monetary assets and liabilities are exposed to changing exchange rates. Therefore, under the temporal method, exposure is defined as the subsidiary's net monetary asset or net monetary liability position. A firm has net monetary assets if its monetary assets exceed its monetary liabilities. If the monetary liabilities exceed the monetary assets, the firm has a net monetary liability exposure.

Since very few assets are considered to be monetary (mainly cash and receivables), most firms have net monetary liability exposures. If the parent has a net monetary liability exposure when the foreign currency (AUD) is appreciating, the result is a loss. Conversely, a net monetary liability exposure coupled with a depreciating currency will result in a gain. (Study Session 6, LOS 23-c)



Gary Smith, CFA, has been hired lo analyze a specialty tool and machinery manufacturer, Whitmore Corporation (WMC). WMC is a leading producer of specialty machinery in the United States. At the end of 2006, WMC purchased York Tool Company (YTC), an Australian firm in a similar line of business. YTC has partially integrated its marketing functions within WMC but still maintains control of its operations and secures its own financing. Following is a summary of the income statement and balance sheet for YTC (in millions of Australian dollars - AUD) for the past three years as well as exchange rate data over the same period.






Smith has discovered that WMC has a small subsidiary in Ukraine. The Subsidiary follows IAS accounting rules and uses FIFO inventory accounting. The Ukrainian subsidiary was acquired ten years ago and has been fully integrated into WMC's operations. WMC obtains funding for the subsidiary whenever the company finds profitable investments within Ukraine or surrounding countries. According to forecasts from economists, the Ukrainian currency is expected to depreciate relative to the U.S. dollar over the next few years. Local currency prices are forecasted to remain stable, however.

One of the managers at WMC asks Smith to analyze a third subsidiary located in India. The manager has explained that real interest rates in India over the last three years have been 2.00%, 2.50%, and 3.00%, respectively, while nominal interest rates have been 34.64%, 29.15%, and 25.66%, respectively. Smith requests more time to analyze the Indian subsidiary.

Determine whether the translated total asset turnover for YTC for 2008 would be higher under the all-current or temporal method.

  1. Temporal method.
  2. All-current method.
  3. No difference between temporal and all-current methods.

Answer(s): B

Explanation:

total asset turnover is calculated as: revenue / total assets

Note that no calculations are necessary to answer this question. Revenues are translated using the same average exchange rate in the temporal and all-current methods. The enly difference in the total asset turnover ratio must therefore be in the denominator (i.e., total assets). Under the all- current method, assets are translated using the current rate. Under the temporal method, monetary assets are translated using the current rate, and nonmonetary assets are translated using the historical rate. Since the historical rate is lower than the current rate, the nonmonetary assets (and therefore total assets) will have a higher value under the temporal method. A higher asset value means a lower total asset turnover ratio under the temporal method. The calculation of the total asset turnover ratio using both methods is provided for reference below:



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