Intercorporate EOC question 6 Page 164

Doing this question I’m all confused about how to read the question and the solution didnt help. Do we assume Cinnamon is deemed to have control in 2009 and 2010 or just 2010?

The solution for some reason goes into giving the operating margin for Cinnamon and Cambridge individually in 2010. It also finds the Consolidated operating margin which does make sense for 2010.

The solution doesnt find the consolidated operating margin in 2009 though. I would’ve found that as well and compared that to the 2010 one.

Am I missing something here?

Specifically the question says:

Compared to Cinnamons operating margin in 2009, if it is deemed ot have control of Cambridge, its operating margin in 2010 will most likely be:

I would just find the consolidated operating margin for 2009 and 2010 and compare them. In 2009 they dont find it and just find the individial operating margins for cambridge and cinnamon.

If anybody can shed some light on this much appreciated.

Looks wrong, but i don’t see it on the errata.

You are simply required to compare Cinnamon’s 2009 operating margin (126/1400) to to its 2010 operating margin where it consolidates the operating margin contribution from Cambridge (142+88/1575+1100)

The consolidation comes into effect on Jan 1 2010, so one cannot consolidate Cambridge results in 2009.

Further, the only reason the solution shows Cambridge operating margin separately and compares it to Cinamons operating margin, is to make a point that if the subsidiary (Cambridge) that is being consolidated has a lower operating margin than the parent (Cinnammon), then post-consolidation it would result in a lower overall overall margin.

CFA 2014 – I thought that initially as well. I dont think you can straight take the 2009 Operating margin for Cinnamon (126/1400)

Although we havent consolidated in 2009, Cinnamon still has a 19% share in Cambridge. The dividends paid by Cambridge should be included as well I think which is Dividend Income = .19 * 20 = 3.8. Revenue would remain the same.

I would have Operating Profit Margin = (126 + 3.8) / 1400 = 9.27%. I would still get A as the answer but not by the solutions.

If you’re confused about the 3.8 — look back at Q1.

Also CFA2014 — Even your 126/1400 is not in the solutions as well. Thats why I want to know what we’re trying to compare to. Solutions dont tell us so I’m hoping one of you can clarify.

The 3.8 is already included in EBT (as noted in Q1), so if you add it back on your are double counting, which is incorrect.

I think the solution is written incorrectly (but the answer correct) since you’re supposed to compare to 2009 but it doesn’t calculate 2009 Operating Margin, which doesn’t make sense.

Good catch ro424. Yeah, I dont understand why the solution is not done properly either.

Say for example though you didnt read question 1. The questions we did in the chapter(the readings), these contributions to EBT or NI from dividends were not just included in the IS of the company like they are in Q1 of the EOC question.

If it wasnt for question 1, would you have added in the dividend income? I would have.

I would’ve considered each IS completely seperate.

Wouldn’t have added it b/c we are presented with an actual financial statement for y/e 2009 (the year the investment was held), so the assumption must be the dividend income is represented therein.

You’re right. Thanks for the input. I actually think this type of specificity per question is actually required to be ready for level II.

Sometimes no solution in the book can assist in understanding a topic better.

Thanks again

Sorry i m kinda jumping in between, but i m still not sure what is the ambiguity here if any…

cipherap15- You are right- 126/1400 is not in the solution, and that is why i added the last paragraph (“Further…”) Either go with calculation logic (i.e. compare126/1400 to 2010 consolidated ratio) or go with the logic explained in the solution, which is a different way of looking at it, though still makes sense.

3.8 would not be included as somebody else pointed out the reason.

The ambiguity is that the question asks to compare the 2009 operating margin to the post-consolidation 2010 operating margin. However, the solution calculates the 2010 operating margin pre-consolidation and compares it to the 2010 post-consolidation operating margin. It completely ignores the 2009 operating margin, which is what the question asks you to compare against.