International Condor is a large U.S. based company that designs and manufacturers clothing for men and women throughout the world. The firm has recently been acquiring subsidiaries in a number of other countries including Norway, Japan, Canada, and Russia. Taylor Robinson is the Chief Operating Officer for International Condor. Although Robinson has been part of the firm’s management team for over 20 years, she has little experience managing a multinational operation. Robinson has enlisted the help of International Condor’s Chief Financial Officer, Richard Greenley, to assess the impact of the foreign subsidiaries on the parent company’s operations. Greenley prepares the firm’s consolidated financial statements in U.S. dollars, but is concerned about the impact that changes in exchange rates could have on the final reports. In order to learn more about what is going on with the other divisions, Robinson and Greenley have called a meeting of the regional vice presidents in charge of Condor’s foreign operations. Before starting the meeting, Greenley hands out a paper that shows exchange rates between the local currencies of each division and the U.S. dollar. Figure 1: Exchange rate information (in direct or indirect quotes): Norwegian Kroner 2002 $0.15, 2003 $0.11, 2004E 0.08 Japanese Yen 2002 125/, 2003 115/ 2004E 113/ Canadian Dollar 2002 1.4CAD 2003 1.48CAD 2004 1.48CAD Russian Ruble 2002 $0.058 2003 $0.035 2004E $0.022 Javier Winter is the regional vice president in charge of International Condor’s Norwegian operations. Winter reports that sales in the reporting currency declined from $10 million in 2002 to $8 million in 2003. In his report, Winter attributed the decline to exchange rate flow effects. Winifred Law is the regional vice president overseeing International Condor’s Japanese division. In her report, Law forecasts local Japanese sales to increase by 20% from 250 million yen in 2003 to 300 million yen in fiscal year 2004. Chad Singleton is the regional vice president for the Canadian division. Singleton provides an optimistic report and states that return on equity has increased from 12% in 2002 to 14.2% in 2003. Gwen Rozko is the regional vice president in charge of the Russian division. Rozko states that economic conditions in Russia are not good, largely due to a rapid increase in consumer prices. She says that she would appreciate input from the management team as to how to handle her division in such an environment. After the regional vice presidents have given their reports, Greenley asks the managers in the room a series of questions. The first question Greenley asks is: “What exchange rate holding effects are having the largest impact on your division’s financial statements?” Singleton states that the Canadian division has a large amount of fixed assets that were purchased years ago, and that not using accelerated depreciation accounting has caused currency fluctuations to cause large shifts in his reported assets. Robinson tells him that each of the subsidiaries have borrowed from the parent company and that having the debt on each division’s balance sheet causes changes in the consolidated financials because interest payments are made in the local currency. Greenley’s second question relates to the high rate of inflation currently being experienced in Russia. Rozko states that her division operates in a hyperinflationary economy because the Russian consumer price index in 2003 was 22% and was 21% in 2002. Law suggests that due to the high rate of inflation, International Condor use the current rate method for translating the Russian division’s balance sheet before consolidating it with the parent’s financial statements. After another 60 minutes of questions and discussion, Robinson adjourns the meeting and thanks the managers for their input. Winter reported a decline of sales for International Condor’s Norwegian operations based on the reporting currency. What would have been the change in sales had Winter used the local currency in his report? International Condor’s Norwegian operations would show a sales: A) increase of NKr 37,580,000. B) decrease of NKr 12,000,000. C) decrease of NKr 880,000. D) increase of NKr 6,060,000. -------------------------------------------------------------------------------- Winter stated that foreign currency flow effects were the cause of the decline in sales for International Condor’s Norwegian subsidiary. Which of the following would least likely be considered a flow effect? A) Revenue received from Norwegian operations during the reporting period. B) Translation of EBITDA into the reporting currency. C) Operating expenses paid during the reporting period. D) Goodwill reported upon purchase of the Norwegian subsidiary. -------------------------------------------------------------------------------- Law made a forecast about International Condor’s sales for its Japanese region. If Law’s forecast is correct, what will be the percentage increase in revenue once translated into the reporting currency? A) 20.0%. B) 4.8%. C) 22.1%. D) 18.3%. -------------------------------------------------------------------------------- Regarding the answers to Greenley’s questions about holding effects: A) Singleton’s answer was correct; Robinson’s answer was correct. B) Singleton’s answer was incorrect; Robinson’s answer was incorrect. C) Singleton’s answer was incorrect; Robinson’s answer was correct. D) Singleton’s answer was correct; Robinson’s answer was incorrect. -------------------------------------------------------------------------------- Greenley is considering the effects of a change in exchange rates between the Canadian and U.S. dollar, and the resulting impact from incorporating the Canadian division’s results into International Condor’s consolidated financials. If the Canadian dollar appreciates by 10% relative to the U.S. dollar from its 2003 level, what would be the exchange rate and the affect of translating $1,000 in sales from Canadian to U.S. dollars? A) 1.628 CAD/$US 1, $1,000 would decrease from $675.68 to $614.25. B) 1.332 CAD/$US 1, $1,000 would decrease from $1,480 to $1,332. C) 1.345 CAD/$US 1, $1,000 would increase from $675.68 to $743.49. D) 1.628 CAD/$US 1, $1,000 would increase from $1,480 to $1,628. -------------------------------------------------------------------------------- Regarding Greenley’s question about the high rate of inflation in Russia: A) Rozko’s statement is correct; Law’s suggestion is incorrect. B) Rozko’s statement is correct; Law’s suggestion is correct. C) Rozko’s statement is incorrect; Law’s suggestion is correct. D) Rozko’s statement is incorrect; Law’s suggestion is incorrect
- D 2. D 3. C 4. D 5. B 6. D This may hurt seeing the answers.
I can’t even tolerate reading this whole thing…let alone trying to solve it.
Haha, I doubt many more people will respond.
SPOILER, answer here if you’re still working on it- Nibs, nice work. We did the same thing wrong on the same q- answer make sense, i think you probably felt the fatigue i did as i got to the end of this vignette… fell for an easy trap, didn’t take the reciprocal. i haven’t taken any full practice tests yet, but if it’s 60 q’s of stuff this long, i am nervous about my endurance. 6 questions, ok. 60? scary. Winter reported a decline of sales for International Condor¡¯s Norwegian operations based on the reporting currency. What would have been the change in sales had Winter used the local currency in his report? International Condor¡¯s Norwegian operations would show a sales: A) increase of NKr 37,580,000. B) decrease of NKr 12,000,000. C) decrease of NKr 880,000. D) increase of NKr 6,060,000. Your answer: D was correct! Year 2002 sales were ($10,000,000 / 0.15) = NKr 66,700,000. Year 2003 sales were ($8,000,000 / 0.11) = NKr 72,700,000. Taking into account the change in exchange rate, 2003 sales were approximately NKr 6,060,000 more than 2002 sales. -------------------------------------------------------------------------------- Winter stated that foreign currency flow effects were the cause of the decline in sales for International Condor¡¯s Norwegian subsidiary. Which of the following would least likely be considered a flow effect? A) Revenue received from Norwegian operations during the reporting period. B) Translation of EBITDA into the reporting currency. C) Operating expenses paid during the reporting period. D) Goodwill reported upon purchase of the Norwegian subsidiary. Your answer: D was correct! Flow effects refer to the impact of changes in the exchange rates on flow variables such as revenue, or expense items on the income statement. Goodwill from the purchase of the Norwegian subsidiary would be recorded on International Condor¡¯s balance sheet. -------------------------------------------------------------------------------- Law made a forecast about International Condor¡¯s sales for its Japanese region. If Law¡¯s forecast is correct, what will be the percentage increase in revenue once translated into the reporting currency? A) 20.0%. B) 4.8%. C) 22.1%. D) 18.3%. Your answer: C was correct! The impact of a decrease in yen means that once translated back into U.S. dollars, it will take fewer yen to buy a U.S. dollar. The translation will have the effect of increasing sales. (250,000,000 / 115) = $US 2,173,913, (300,000,000 / 113) = $US 2,654,867, a 22.1% increase. -------------------------------------------------------------------------------- Regarding the answers to Greenley¡¯s questions about holding effects: A) Singleton¡¯s answer was correct; Robinson¡¯s answer was correct. B) Singleton¡¯s answer was incorrect; Robinson¡¯s answer was incorrect. C) Singleton¡¯s answer was incorrect; Robinson¡¯s answer was correct. D) Singleton¡¯s answer was correct; Robinson¡¯s answer was incorrect. Your answer: D was correct! Holding effects refer to the impact of exchange rates on assets and liabilities, such as inventories and cash balances. Singleton¡¯s answer was correct because the change in the value of fixed assets due to exchange rate fluctuations is a holding effect. Robinson¡¯s answer was incorrect because she identified interest payments being denominated in the local currency as her concern. The effect of interest payments would be reflected on the income statement and would be considered a flow effect. As a general rule, holding effects impact the balance sheet and flow effects impact the income statement. -------------------------------------------------------------------------------- Greenley is considering the effects of a change in exchange rates between the Canadian and U.S. dollar, and the resulting impact from incorporating the Canadian division¡¯s results into International Condor¡¯s consolidated financials. If the Canadian dollar appreciates by 10% relative to the U.S. dollar from its 2003 level, what would be the exchange rate and the affect of translating $1,000 in sales from Canadian to U.S. dollars? A) 1.628 CAD/$US 1, $1,000 would decrease from $675.68 to $614.25. B) 1.332 CAD/$US 1, $1,000 would decrease from $1,480 to $1,332. C) 1.345 CAD/$US 1, $1,000 would increase from $675.68 to $743.49. D) 1.628 CAD/$US 1, $1,000 would increase from $1,480 to $1,628. Your answer: B was incorrect. The correct answer was C) 1.345 CAD/$US 1, $1,000 would increase from $675.68 to $743.49. One Canadian dollar currently purchases 1 / 1.48 = 0.6757 $US. If the CAD appreciates by 10%, it will purchase 0.7432 $US. The resulting exchange rate is 1 / 0.7432 = 1.345. The result would be that $1,000 CAD revenue would increase to $743.49. -------------------------------------------------------------------------------- Regarding Greenley¡¯s question about the high rate of inflation in Russia: A) Rozko¡¯s statement is correct; Law¡¯s suggestion is incorrect. B) Rozko¡¯s statement is correct; Law¡¯s suggestion is correct. C) Rozko¡¯s statement is incorrect; Law¡¯s suggestion is correct. D) Rozko¡¯s statement is incorrect; Law¡¯s suggestion is incorrect. Your answer: D was correct! SFAS 52 defines a hyperinflationary economy as one that experiences a cumulative 3-year inflation rate of more than 100%. On an annual basis, this means inflation would need to exceed 26% to reach a cumulative 3-year rate of more than 100%. (1.263 ¨C 1) ¡Ö 1.00, or 100%. Although the inflation rates of 21% and 22% are high, they are not to the point where they would be considered hyperinflationary. Law¡¯s suggestion is also incorrect. In an economy with high inflation, the foreign currency will be rapidly depreciating against the reporting currency. If the current rate were used to translate the balance sheet, it would result in very low values for all assets and liabilities. In a situation where inflation is extremely high, the real value of nonmonetary assets and liabilities is typically not affected by the high inflation because their local currency denominated values increase. As a result, the temporal method is more appropriate because nonmonetary accounts are remeasured at the historical rate.
We forget to 1/x the currency. Crap.
i got the three calculations right and missed the theoretical questions. Very good example though. Help me learn more. Thanks!
Nice question took me 25 mins. Ans = D/D/C/D/D/D A1. 8/0.11 - 10/0.15 = 72.7272 - 66.6667 = 6.0605. Ans = D? A2. Flow Effect -> IS. Option A (Revenue ), B (EBITDA ), C (OE) all out. Goodwill is BS. Ans= D? A3. 250/115 - 300/113 = [2.654867 -2.17391304]/2.17391304= 0.22123882. Ans = C? A4. Holding effects-> BS, Singleton talks abt Assets = correct, Robinson talks abt expense = incorrect. Ans = D? A5. 1.48*1.10 = 1.628 CAD/USD Increases from 1480 to 1628 = Ans = D? A6. Infl data is for 2 yrs only and 1.21*1.22 - 1 is no where close to 1.0. So no Hyperinflation and wrong suggestion on using All Current (we should Ideally use Temporal in HyperInfl) = Ans = D? EDIT: cooool … 5/6 but now I don’t have the capacity left to check why A5 is C and not D
> > A5. > 1.48*1.10 = 1.628 CAD/USD > Increases from 1480 to 1628 = Ans = D? Its because the question states that CAD appreciates and by multiplying 1.48 with 1.1 you are making USD appreciate. I think it must have happened due to fatigue rather than anything else.
Abhi - you are soo correct, I got so tired after the end of this crap vignette that missed such a basic 10th grade question. Fatigue did it to me. 1.48 CAD/USD = 0.67567568 USD/CAD 0.67567568*1.10 = 0.743243248 USD/CAD = 1.345 CAD/USD From: 1000CAD * 0.67567568USD/CAD = 675.67 USD To: 1000CAD * 0.743243248USD/CAD = 743.232 USD I don’t know how I am going to do freaking 10 vignettes in 3 hrs. I am failing this exam, holy sh*t. L1 was so damm easy, all little standalone questions, easy to nail. L2 is an uncontrollable monster.
Dinesh you got it in the bag. I remember schweser questions always took longer than the real thing for level I. Most of my Book 6 tests I used up all my time (or close), while at the real exam I had like almost 20-25 mins left for each section. CFAI is much better at writing questions in my opinion.
I hope we all make it to L3 this year mwvt9. I am so sick and tired of this CFA and want to get done with this (incomplete) mission ASAP.
I hear you. Cramming this into 80 days has not been fun. I am feeling pretty toasty right now.
mwvt9 Wrote: ------------------------------------------------------- > I hear you. Cramming this into 80 days has not > been fun. I am feeling pretty toasty right now. 90 days for me 
I started 1st March. But I still have the complete SS1 and SS2 to cover. Just ready 16 study session from Schweser.
That is funny we are in the exact same place. I will finish econ tomorrow and then have SS 1 and 2 left. Are you all schweser?
I am a 100% Schweser boy. I plan to do all the CFAI end of chapter questions if I have time. And not thinking of doing Ethics for 15 more days. I need to review Equities/Der/PM which I don’t remember anything now.
Do you have a plan for review? I am trying to figure one out now.
Yes, I am going SS3 to SS18 from QBank. I am on SS8 and that is taking me forever to get done. Plan to take 1 exam probably 30th May or 1st June or is it too late by then? Because last week would be all CFAI exams from their website and nothing else
So you are doing nothing but questions now? When you use the q-bank are you doing immediate feedback and then looking up answers you miss/guess on in schweser or do you wait to the end of the exam for the answers? How many questions are you doing per SS? Sorry to bombard you with questions.
I have started doing the ‘Browse LOS’ option and then going through all the LOS line by line doing the ‘LOS Quiz’ at the end of each LOS Explaination’. Thought I did all the questions for Quant and Econ from QBank, but figured out that I will not be left with any time if you keep going that way. It’s important to cover ALL the topics first and then nail each one of them depthwise. Per SS (For example SS8) has around 100 LOS quiz questions. Though there are total 198 questions in QBank for SS8. We really have less time and work is really brutal thesedays, I hardly get couple of hours to study after work. I am really worried if I will be able to make it on time. Well… Atleast we tried…