less than 60 days left. I think we should start doing Vignettes for lunch if possible.
I agree. I’ll see what I can do. The problem lies with copying and pasting getting distorted.
Question 2 - 87479 Clothing Tree is a Milan-based holding company. The holding company comprises individual firms with unique brands that produce and sell products ranging from infant and children’s clothing, to fashion wear, to work uniforms, to undergarments. The firm’s founder and chairman, Romano Nocci, says that “since we assume that people will continue to wear clothes, we continue to believe that this is a good business for the long haul.” However, in spite of his overall belief in the soundness of the clothing market, he realizes that tastes and fashions change, and believes that the firm should constantly be on the lookout for suitable candidates to add to the Clothing Tree empire. He also believes that it may make sense to restructure the firm by creating a new holding company, Family Tree, to own the Clothing Tree plus two new divisions—Food Tree and Drug Tree. The Food Tree would be a holding company formed to acquire companies in all phases of the food business. The Drug Tree would be a holding company formed to acquire companies in all phases of the non-prescription pharmaceuticals market. Both of these product lines are necessary goods, so Nocci believes that they would fit well with the firm’s existing clothing businesses. To help implement this acquisition strategy, Nocci has hired Zurich Investment Advisers. Armando Palocci, CFA has been assigned to be the lead advisor in this effort. When Palocci and his team met with Nocci and other key Tree managers, they discussed a wide-ranging set of subjects relating to the nascent acquisition plans. These discussions are summarized in the paragraphs below. Palocci asks whether additions to the Tree empire will continue to maintain their identities. For example, if Food Tree were to purchase Parma Foods, would the company be operated as a subsidiary and maintain its identity, or would it be combined with other acquisitions and rebranded as Food Tree? Nocci indicates that this would likely depend upon the value of maintaining the brand versus the efficiencies that could be gained from combining acquisitions. Does the Tree want to avoid firms that have takeover defenses in place? If so, which types of defenses? Nocci responds that he “would prefer to avoid firms that have pre-offer defenses, such as poison pills and pac-man defenses in place because these make the cost of an acquisition prohibitive. However, if a firm has shown a willingness to pay greenmail in the past, he would not be averse to testing the management again on this count.” Some of the acquisition targets will likely have business interests in the U.S. and Canada, as well as Europe. Palocci describes to Nocci how industry concentration is measured in the U.S., and what might cause an acquisition to be challenged on antitrust grounds. Nocci indicates that whether or not it makes sense to run the risk of an antitrust challenge will depend, in part, on the potential gains from the merger. Thus, they must be evaluated on a case by case basis. Palocci and Nocci conclude their discussions with a review of acquisition target valuation methods, the evidence concerning the distribution of merger benefits, and strategies that the firm might employ if it were to purchase a firm with several subsidiaries, some of which it does not wish to keep. Part 1) If Food Tree is successful in purchasing a food company for which it maintains the firm’s existing identity and brands, the first such purchase would be classified as a: A) statutory, conglomerate merger. B) subsidiary, conglomerate merger. C) subsidiary, horizontal merger. Part 2) With regard to Nocci’s description of the types of takeover defenses he would prefer to avoid, he is: A) correct with respect to the poison pill defense, but incorrect with respect to the pac-man defense. B) incorrect with respect to the poison pill defense, and incorrect with respect to the pac-man defense. C) correct with respect to the poison pill defense, and correct with respect to the pac-man defense. Part 3) With respect to antitrust challenges in the United States, Palocci should have told Nocci that the decision to challenge is based upon a: A) qualitative measure of industry concentration, but that the issue is not clear-cut. B) quantitative measure of industry concentration, but that the issue is not clear-cut. C) quantitative measure of industry concentration, and that the issue is clear-cut once the change in the measure is known. Part 4) Food Tree is likely to have to evaluate potential acquisition targets that are temporarily experiencing financial distress or earnings problems that can be solved with an application of the Tree’s financial strength and management expertise. That said, the food industry, by and large, consists of firms that have relatively predictable revenue and cost patterns, and the level of investment risk is well-understood. All else being equal this set of circumstances would seem to argue for which of the following valuation approaches? A) Discounted cash flow. B) Comparable company. C) Comparable transaction. Part 5) Suppose that Drug Tree has identified three comparable companies relative to a target under evaluation. The valuation metric is price to sales (P/S). The three comparable companies have P/S ratios of 2.17, 1.98, and 2.09. The target has sales of €600m. What value of the P/S should be applied to the target, and what is the estimated value? P/S Estimated Value A) 2.17 €1302m B) 2.08 €1248m C) 1.98 €1188m Part 6) Palocci advises that if the Food Tree purchases a firm that includes a subsidiary that does not fit the Tree’s strategic plan, the firm can sell the subsidiary via divestiture, equity carve-out, spin-off, or split-off. However, he tells Nocci that only the divestiture will provide Food Tree with cash after completion, because the others all involve the distribution of stock in the subsidiary. Palocci’s advice is: A) correct with respect to the alternatives, but incorrect with respect to the provision of cash. B) correct with respect to the alternatives, and correct with respect to the provision of cash. C) incorrect with respect to the alternatives, and incorrect with respect to the provision of cash. --------------------------------------------------------------------------------
Q1.B Q2.A [Pacman is post and poison pill is pre] Q3.B [HHI and change in HHI after merger decides Anti-Trust] Q4.A Q5.B [2.08 and 1248m] Q6.A EDIT: No ‘C’, that sounds fishy?
- B 2) A 3) B 4) A 5) B 6) A
1.) c --> it’s horizontal for the food company, but not for holding company. The question is kind of ambiguous… 2.) a 3.) b 4.) a 5.) b 6.) a
B A B A B A
1.C 2.A 3.B 4.A 5.B 6.A
I retract my answer for 1 and go with B instead.
- B 2) A 3) B 4) A 5) B 6) A? (can someone please explain provision of cash for these) And is this directly from CFAI text… seems word for word somethign i read before… and still probabyl didnt get all 6 right
CFAdreams Wrote: ------------------------------------------------------- > 1) B > 2) A > 3) B > 4) A > 5) B > 6) A? (can someone please explain provision of > cash for these) > > And is this directly from CFAI text… seems word > for word somethign i read before… and still > probabyl didnt get all 6 right 100%!
Ditch, questions were too easy. We have to turn up the heat with less then 60 days to go.
Question 1 - 88600 Mary Smith, a Level II CFA candidate, was recently hired for an analyst position at The Bank of Ireland. Her first assignment is to examine the competitive strategies employed by various French wineries. Smith is eager to impress her boss, Ron VanDreisen, and has taken care to make sure she is following the CFA Institute Standards of Practice when writing her research report. Smith’s report identifies four wineries that are the major players in the French wine industry. Key characteristics of each are cited below in Figure 1. Figure 1: Characteristics of Four Major French Wineries South Winery North Winery East Winery West Winery Founding Date 1750 1903 1812 1947 Generic Competitive Strategy ? Cost Leadership Cost Leadership Cost Leadership Major Customer Market (more than 80% concentration) France France England USA Production Site France France France France In the body of Smith’s report, she includes a discussion of the competitive structure of the French wine industry. She notes that over the past five years, the French wine industry has not responded to changing consumer tastes. Profit margins have declined steadily and the number of firms representing the industry has decreased from 10 to 4. It appears that participants in the French wine industry must consolidate in order to survive. Smith’s report notes that French consumers have strong bargaining power over the industry. She supports this conclusion with five key points. Bargaining Power of Buyers Many consumers are drinking more beer than wine with meals and at social occasions. Increasing sales over the internet have allowed consumers to better research the wines, read opinions from other customers, and identify which producers have the best prices. The French wine industry is consolidating and consists of only 4 wineries today compared to 10 wineries five years ago. Over 65% of the business for the French wine industry consists of purchases from restaurants. Restaurants typically make purchases in bulk, buying 4 to 5 cases of wine at a time. Land where the soil is fertile enough to grow grapes necessary for the wine production process is scarce in France. After completing the first draft of her report, Smith takes it to VanDriesen to review. VanDriesen tells her that he is a wine connoisseur himself, and often makes purchases from the South Winery. Smith tells VanDriesen, “In my report I have classified the South Winery as a stuck-in-the-middle firm. It tries to be a cost leader by selling its wine at a price that is slightly below the other firms, but it also tries to differentiate itself from its competitors by producing wine in bottles with curved necks, which increases its cost structure. The end result is that the South Winery’s profit margin gets squeezed from both sides. VanDriesen replies, “I have met members of the management team from the South Winery at a couple of the wine conventions I have attended. I believe that the South Winery could succeed at being at both a cost leadership and a differentiation strategy if they separated its operations into distinct operating units, with each unit pursuing a different competitive strategy.” Smith makes a note to do more research on generic competitive strategies to verify VanDriesen’s assertions before publishing the final draft of her report. Part 1) If the French home currency were to greatly appreciate in value compared to the English currency, what is the likely impact on the East Winery? A) No impact since the major market for East Winery is England, not France. B) Make the firm more competitive in the English market. C) Make the firm less competitive in the English market. Part 2) Smith would categorize the French wine industry into which of the following life cycle phases? A) Pioneer Phase. B) Mature Phase. C) Decline Phase. Part 3) VanDriesen tells Smith that he likes the fact that the conclusions in her report are backed up with facts, but tells her that he is concerned about the section concerning the Bargaining Power of Buyers. He says that while all of the points she listed may be factual, they do not all support her conclusion. Which of Smith’s points support the conclusion that consumers have strong bargaining power over the industry? A) Points 2, 3, and 4. B) Points 2 and 4. C) Points 1, 2, and 4. Part 4) Smith notes in her report that the West Winery might differentiate its wine product on attributes that buyers perceive to be important. Which of the following attributes would be the most likely area of focus for the West Winery to create a differentiated product? A) The price of the product. B) A focus on customers aged 30 to 45. C) The method of delivery for the product. Part 5) Regarding Smith and VanDriesen’s statements made about the competitive strategy of the South Winery: A) both are incorrect. B) only one is correct. C) both are correct. Part 6) Smith knows that a firm’s generic strategy should be the centerpiece of a firm’s strategic plan. Based on a compilation of research and documents, Smith makes four observations about the North Winery and their strategic planning process. North Winery’s price and cost forecasts account for future changes in the structure of the French wine industry. North Winery places each of its business units into one of three categories: build, hold, or harvest. North Winery uses market share as the key measure of their competitive position. Which observation(s) least likely support the conclusion that the North Winery’s strategic planning process is guided and informed by their generic competitive strategy? A) Observation 2 only. B) Observations 2 and 3. C) Observations 1 and 3. -------------------------------------------------------------------------------- Question 2 - 104165 Frank Palmer, CFA, is preparing a report on the tobacco industry for investors in his home country of Molvania. Molvania is a small coastal country of approximately 15 million inhabitants that is run by a strong monarchy headed by reigning King Alexander III. The country is blessed with warm summers and moderate winters and has a thriving tourist industry. The country’s main industry, however, is tobacco. Molvania has adopted the U.S. dollar as its currency of business. Despite numerous health-related problems, lawsuits, and rising prices associated with tobacco products, there is still something attractive about tobacco—strong earnings. Legal battles continue to affect the tobacco industry, however. Smokers stricken with cancer and other smoking-related health problems have tried to pool their complaints together in large class-action lawsuits. Nevertheless, the global industry continues to maintain its profitability even if growth is limited. Tobacco sales in Molvania are dominated by Royal Tobacco Incorporated (RTI) and Universal Tobacco Products Incorporated (UTP). These two large companies control 80% of the domestic market. In 1998, Molvania established a 51% state-owned tobacco company through a joint venture with RTI and UTP. The plan was for the new entity, Molvania Tobacco International (MTI), to develop a thriving export business and to become known around the world. A handful of smaller companies continued to compete domestically and held the remaining 20% of the home market but did little or no export business. A unique aspect of the Molvanian tobacco industry is that, along with its rich supply of tobacco plants—considered by experts to produce the best tobacco in the world—there is a special hand-rolling skill which enables local manufacturers to produce a premium product. This ability is passed from generation to generation in what amounts to a closely guarded secret that permits high quality output. Indeed, several South American and Caribbean-based companies have made numerous unsuccessful attempts to acquire the Molvanian skill. There are several strong international competitors that produce premium brand products and have well-developed distribution networks. However, Molvanian tobacco products are generally considered to be among the best anywhere. To maintain control, MTI decided to appoint an exclusive group of dealers around the world to distribute Molvanian tobacco products. Only these select dealers would have access to the Molvanian supply. In addition, MTI was responsible for all marketing efforts worldwide. A recent government survey determined that by the end of last year, the export business accounted for more than one-half of the dollar volume of the Molvanian tobacco industry. Even though many of the country’s plantations were originally state-owned, King Alexander bowed to the will of the majority and permitted tobacco farmers to buy land through low cost loans with the understanding that partial repayment could be made through higher-yielding harvests. Palmer makes the following two statements regarding the threat of substitutes within the industry: Statement 1: Substitutes exist, but this threat is relatively low due to the premium nature of Molvania’s products. Statement 2: The threat should be considered as very low due to the existence of competitors who also make premium products. Palmer is evaluating the price sensitivity and the bargaining power of buyers and makes the following statements in his report. Statement 3: Since a premium product is being offered, price sensitivity is relatively less important. Statement 4: Due to the presence of other competitors worldwide, pricing issues cannot be ignored. Part 1) Which of the following is least likely to be a barrier to entry in the Molvanian tobacco industry? A) Cigarette consumption has declined in recent years. B) The supply of labor is limited due to the skill required. C) The country is small, making land difficult to acquire. Part 2) Which of the following is most accurate regarding the bargaining power of buyers (the select group of tobacco dealers) and buyers’ bargaining leverage? A) Buyers have significant leverage because they purchase the tobacco products. B) Buyers have leverage because they have the ability to initiate lawsuits against the industry. C) Buyers have very little leverage since they are appointed by the majority state-owned company and have little or no access to additional supply. Part 3) Palmer concludes that the bargaining power of suppliers is high because tobacco farmers have some control over the harvest and have a measure of control over the volume of tobacco produced. Which of the following additional factors, when considered in conjunction with the factor Palmer cites, best supports the conclusion that the bargaining power of suppliers is moderate instead of high? A) Molvanian manufacturers have managed to protect their relative advantage in producing hand-rolled tobacco products. B) Smaller companies within Molvania have little or no export business. C) Much of the industry is either state-controlled or influenced by two large domestic companies. Part 4) Which statement most accurately portrays the rivalry among existing competitors in the industry? Rivalry among existing competitors in the industry is: A) very high. B) moderate. C) very low. Part 5) Are Palmer’s statements regarding the threat of substitutes within the industry correct or incorrect? A) Only statement 1 is correct. B) Both statements are correct. C) Only statement 2 is correct. Part 6) Are Palmer’s statements regarding price sensitivity and bargaining power of buyers correct or incorrect? A) Only statement 3 is correct. B) Only statement 4 is correct. C) Both statements are correct.
- A 2) C 3) B 4) B 5) B 6) C 1) A 2) C 3) B 4) C 5) B 6) A Ditch were these easy problems?
These were advanced…
Part 1) Your answer: A was incorrect. The correct answer was C) Make the firm less competitive in the English market. Foreign exchange rates can significantly affect the competitiveness and profitability for a given industry. For industries that derive a significant proportion of sales via exports, an appreciating currency is usually bad news because it makes the industry less competitive in the overseas market. In this case, the appreciating French currency makes French imports more expensive in England. (Study Session 11, LOS 40.c) This question tested from Session 11, Reading 38, LOS a. Part 2) Your answer: C was correct! The decline life cycle phase has the following characteristics: Shifting tastes or technologies have overtaken the industry A decline in demand Lower profit margins Participants must either consolidate, reinvent themselves, or fail (Study Session 11, LOS 39.b) This question tested from Session 11, Reading 38, LOS a. Part 3) Your answer: B was incorrect. The correct answer was C) Points 1, 2, and 4. Determinants of buyer power include buyer concentration, buyer volume, buyer information, available substitutes, switching costs, brand identity, and product differences. Point 1 addresses available substitutes, Point 2 addresses buyer information, and Point 4 addresses buyer and buyer concentration. Point 3, which addresses the number of competitors in the industry and Point 5, new entrants, may be factual statements but do not support the conclusion that consumers have strong bargaining power. (Study Session 11, LOS 37.d) This question tested from Session 11, Reading 38, LOS a. Part 4) Your answer: B was incorrect. The correct answer was C) The method of delivery for the product. Product differentiation can be based on the product itself, the method of delivery, or the marketing approach. (Study Session 11, LOS 38.b) This question tested from Session 11, Reading 38, LOS a. Part 5) Your answer: B was incorrect. The correct answer was C) both are correct. A ‘stuck in the middle’ firm is one that tries to attain both cost leadership and product differentiation and fails. Such firms compete at a disadvantage to those that have achieved cost leadership or differentiation. Smith’s explanation correctly identifies a “stuck in the middle” firm and the issues such a firm faces. VanDriesen’s statement is also correct. A firm can achieve both cost leadership and product differentiation if it operates separate and distinct operating units with each pursuing a different strategy. (Study Session 11, LOS 38.a) This question tested from Session 11, Reading 38, LOS a. Part 6) Your answer: C was incorrect. The correct answer was B) Observations 2 and 3. A firm that fails to allow their strategic planning process to be guided by their generic competitive strategy usually makes one or more of the following four mistakes: The strategic plan is a list of unrelated action items that does not lead to a sustainable competitive advantage. Price and cost forecasts are based on current market conditions and fail to take into account how industry structure will influence future long-term industry profitability. Business units are placed into categories such as build, hold, and harvest, with the business failing to realize that these are not business strategies, but rather the means to achieve the strategy. The firm focuses on market share as a measure of competitive position, failing to realize that market share is the result and not the cause of a sustainable competitive advantage. Smith’s observations 2 and 3 describe two of these mistakes and therefore do not support the conclusion that the North Winery’s strategic planning process is guided and informed by their generic competitive strategy. (Study Session 11, LOS 38.e) This question tested from Session 11, Reading 38, LOS a. -------------------------------------------------------------------------------- Question 2 - #104165 Part 1) Your answer: A was correct! The supply of labor is limited due to the skill required. The country is small, making land difficult to acquire. Moreover, the state is strongly involved and controls the export business. It would be extremely difficult to penetrate the tobacco industry in Molvania. (Study Session 11, LOS 38.a) This question tested from Session 11, Reading 38, LOS a. Part 2) Your answer: C was correct! Buyers have very little leverage, since they are appointed by the majority state-owned company and have little or no access to additional supply. (Study Session 11, LOS 38.a) This question tested from Session 11, Reading 38, LOS a. Part 3) Your answer: B was incorrect. The correct answer was C) Much of the industry is either state-controlled or influenced by two large domestic companies. In terms of supply, there are two opposing forces at work. Tobacco farmers control the harvest, and they may have a measure of control over the volume of tobacco produced, as Palmer notes. However, much of the industry is either state-controlled or influenced by two large domestic companies, which is consistent with less supplier bargaining power. When these facts are taken into consideration, the conclusion that the bargaining power of suppliers is moderate is a reasonable one. (Study Session 11, LOS 38.a) This question tested from Session 11, Reading 38, LOS a. Part 4) Your answer: C was incorrect. The correct answer was B) moderate. Rivalry among existing competitors in the industry is moderate. While it is limited domestically, the export business is substantially more competitive due in large part to several international companies having well-developed distribution networks. (Study Session 11, LOS 38.d) This question tested from Session 11, Reading 38, LOS a. Part 5) Your answer: B was incorrect. The correct answer was A) Only statement 1 is correct. Substitutes exist, but this threat is relatively low due to the premium nature of Molvania’s products, so Statement 1 is correct. The threat should not be considered as very low due to the existence of competitors who also make premium products, so Statement 2 is incorrect. (Study Session 11, LOS 38.b) This question tested from Session 11, Reading 38, LOS a. Part 6) Your answer: A was incorrect. The correct answer was C) Both statements are correct. Since a premium product is being offered, price sensitivity is of limited importance, so Statement 3 is correct. On the other hand, due to the presence of other competitors worldwide, pricing issues cannot be ignored, so Statement 4 is also correct. (Study Session 11, LOS 38.b) This question tested from Session 11, Reading 38, LOS a.
B A B A B A for first one
wow, 3/12, just as good as guessing… I guess i’ll c ya guys here again in '10 
CFAdreams Wrote: ------------------------------------------------------- > 1) B > 2) A > 3) B > 4) A > 5) B > 6) A? (can someone please explain provision of > cash for these) > > And is this directly from CFAI text… seems word > for word somethign i read before… and still > probabyl didnt get all 6 right Divestitures: I think basically selling to third party Equity Carve out- IPO Spin-Off- New shares to existing holders Split-Off- Exchange of shares Liquidation is another one not mentioned. (self-explanitory)
2nd one Ouch! B B C C A A That sucked.