The question is "In 2008, Zimt’s earnings before taxes includes a contribution from its investment in Oxbow Limited closest to: A. (0.6) million B. 1.0 million C. 1.9 million The correct answer is B according to the book - the market value decreased by 3mm but Zimt’s 10% equity in Oxbow’s dividends provides 2mm (contribution is -1mm). I selected A because technically “-1mm” is “closest to” -0.6mm…I’m guessing the answer hinges on the word “contribution” (possibly implying that the sign is not meaningful), but isn’t this a very misleading question/answer?
Are you able to post the question?
I think… Zimit has a 10% holdings in Oxbow. Since it is held for trading security unrealized gains/losses are counted. so you start out with them losing 3 million in market value -3MM Next Oxbow earned 60 million, so Zimit will see 6 million of NI +6MM Finally Oxbow paid dividends of 20 million, so Zimit in theory paid dividends of 2 million. -2MM 6MM - Net income -3MM change in market value -2MM - dividends paid ------- 1MM Hope this helps and this is actually the right way to look at this problem…
CFAdreams Wrote: ------------------------------------------------------- > I think… Zimit has a 10% holdings in Oxbow. > Since it is held for trading security unrealized > gains/losses are counted. so you start out with > them losing 3 million in market value > > -3MM > > Next Oxbow earned 60 million, so Zimit will see 6 > million of NI > > +6MM > > Finally Oxbow paid dividends of 20 million, so > Zimit in theory paid dividends of 2 million. > > -2MM > > > 6MM - Net income > -3MM change in market value > -2MM - dividends paid > ------- > 1MM > > Hope this helps and this is actually the right way > to look at this problem… This doesn’t seem right to me although I don’t have the question here. If it is held for trading purposes and only 10% ownership, you would not recognize the portion of investment net income into earnings. I think you would just take the unrealized loss plus dividends received into net income but that gives you $(1m) not positive. I don’t understand how the equity investment paying dividends would count against you as a reduction of net income.
I remember this question as well. I believe the answer choice should have been -1MM as opposed to 1MM. If you look in the back of the book at the explanation, it backs this up as well. I think it is an error in the CFAI text. Best, TheChad
Agree. I marked this in my book as an error.
We need someone smarter than me to settle this, but I would think if you count the companies net income (6), you would then have to reduce the dividends paid because you are not keeping that portion of the new income… I mean if you own 10% of the company and are collecting earnings from it, then you would be paying 10% of the dividends. I hate when the CFAI text gets a question wrong, really bugs me why they cant do their own problems they make up…
hey guys – they are asking about the income statement effect. what you are talking about adjusting the Dividends - is a balance sheet effect - bcos you are adjusting for the Investment in subsidiary account. so piece meal - it is 10% of 10 Mill = 1 Million. That is it. maybe they got the number wrong without including the sign. but it has to be 1 Million (Absolute).
My friends, I am a jack @$$… From the CFA errata: “Study Session 5, Reading 21: There were a number of errors in this reading: In the first line on p. 35 (part of boxed Example 9), the income data is for 2001 (instead of 2007). In the table on the same page, some figures were misaligned. Values shown for Long-term debt, Total liabilities, and Shareholders’ equity should be moved up one line to align with Current payables, Long-term debt, and Total liabilities. In the second paragraph at the top of p. 39, make the following insert: “… consistent with the facts in Example 10, the amounts included for the subsidiary in the consolidated income statements …” On problem 7 (p. 57), solution B should show negative €1.0 million instead of positive. Problems 15 & 16 (p. 59) and Solution 16 (p. A-3) should refer to 2008 instead of 2009. In the third line of Solution 4 (p. A-2), change ($20) to ($22). Solution 30 (p. A-4) did not consider NinMount’s inclusion of its investment in Boswell included in its total assets (320) and the restatement of Boswell’s assets to fair value (60). Therefore, C is correct. Using the consolidation method, £1460/£(2140–320+1070 +60) = £1460/£2950 = 0.495. Using proportionate consolidation, £1205/£[1820+(1130/2)] = £1205/£2385 = 0.505. Therefore, total asset turnover is highest using the proportionate consolidation method.” Sorry I stuck up for the CFA and tried to make it fit. Joebroker, good catch. So the answer is you count he 2 million in dividends as positive earnings before cash flow, and the 3 million in change of market value as negative earnings before cash flow. 2 (divdidends) -3 (change in market value) =-1 million in EBT. So the 6 million in investment income has no bearing on the situation? and this is because its a held for trading purposes and is small amount of ownership?
Thanks for pointing out the existence of an errata file - I just assumed that the question was another “trick” - e.g., the “contribution” actually referred to the absolute value which wouldn’t make much sense if it weren’t in the context of the CFAI. Can anyone recommend any CFAI L2 review classes (both weekly and crash courses) - i’m ideally looking for something that is done by an individual and not something sponsored by Schweser - I don’t know if this exists…
yeap … errata. Another thing to account for when going through this stuff.