CFA CFA-Level-II Exam (page: 17)
CFA Level II Chartered Financial Analyst
Updated on: 24-Mar-2026

Delicious Candy Company (Delicious) is a leading manufacturer and distributor of quality confectionery products throughout Europe and Mexico. Delicious is a publicly-traded firm located in Italy and has been in business over 60 years.

Caleb Scott, an equity analyst with a large pension fund, has been asked to complete a comprehensive analysis of Delicious in order to evaluate the possibility of a future investment.
Scott compiles the selected financial data found in Exhibit 1 and learns that Delicious owns a 30% equity interest in a supplier located in the United States. Delicious uses the equity method to account for its investment in the U.S. associate.


Scott reads the Delicious's revenue recognition footnote found in Exhibit 2.

Exhibit 2: Revenue Recognition Footnote
_______________________in millions_______________________Revenue is recognized, net of returns and allowances, when the goods are shipped to customers and collectability is assured. Several customers remit payment before delivery in order to receive additional discounts. Delicious reports these amounts as unearned revenue until the goods are shipped. Unearned revenue was €7,201 at the end of 2009 and €5,514 at the end of 2008.
Delicious operates two geographic segments: Europe and Mexico. Selected financial information for each segment is found in Exhibit 3.



At the beginning of 2009, Delicious entered into an operating lease for manufacturing equipment. At inception, the present value of the lease payments, discounted at an interest rate of 10%, was 6300 million. The lease term is six years and the annual payment is 669 million. Similar equipment owned by Delicious is depreciated using the straight-line method and no residual values are assumed.

Scott gathers the information in Exhibit 4 to determine the implied "stand-alone" value of Delicious without regard to the value of its U.S. associate.


Using the data found in Exhibit 1 and Exhibit 2, which of the following best describes the impact on Delicious's financial leverage in 2009 as compared to 2008?

Delicious Candy Company (Delicious) is a leading manufacturer and distributor of quality confectionery products throughout Europe and Mexico. Delicious is a publicly-traded firm located in Italy and has been in business over 60 years.

Caleb Scott, an equity analyst with a large pension fund, has been asked to complete a comprehensive analysis of Delicious in order to evaluate the possibility of a future investment.

Scott compiles the selected financial data found in Exhibit 1 and learns that Delicious owns a 30% equity interest in a supplier located in the United States. Delicious uses the equity method to account for its investment in the U.S. associate.



Scott reads the Delicious's revenue recognition footnote found in Exhibit 2.

Exhibit 2: Revenue Recognition Footnote
______________________in millions______________________________Revenue is recognized, net of returns and allowances, when the goods are shipped to customers and collectability is assured. Several customers remit payment before delivery in order to receive additional discounts. Delicious reports these amounts as unearned revenue until the goods are shipped. Unearned revenue was €7,201 at the end of 2009 and €5,514 at the end of 2008.

Delicious operates two geographic segments: Europe and Mexico. Selected financial information for each segment is found in Exhibit 3.



At the beginning of 2009, Delicious entered into an operating lease for manufacturing equipment. At inception, the present value of the lease payments, discounted at an interest rate of 10%, was 6300 million. The lease term is six years and the annual payment is 669 million. Similar equipment owned by Delicious is depreciated using the straight-line method and no residual values are assumed.

Scott gathers the information in Exhibit 4 to determine the implied "stand-alone" value of Delicious without regard to the value of its U.S. associate.


The data found in Exhibit 3 indicates that Delicious may be over-allocating resources to the:

Delicious Candy Company (Delicious) is a leading manufacturer and distributor of quality confectionery products throughout Europe and Mexico. Delicious is a publicly-traded firm located in Italy and has been in business over 60 years.

Caleb Scott, an equity analyst with a large pension fund, has been asked to complete a comprehensive analysis of Delicious in order to evaluate the possibility of a future investment.

Scott compiles the selected financial data found in Exhibit 1 and learns that Delicious owns a 30% equity interest in a supplier located in the United States. Delicious uses the equity method to account for its investment in the U.S. associate.



Scott reads the Delicious's revenue recognition footnote found in Exhibit 2.

Exhibit 2: Revenue Recognition Footnote
________________________in millions_________________________Revenue is recognized, net of returns and allowances, when the goods are shipped to customers and collectability is assured. Several customers remit payment before delivery in order to receive additional discounts. Delicious reports these amounts as unearned revenue until the goods are shipped. Unearned revenue was €7,201 at the end of 2009 and €5,514 at the end of 2008.

Delicious operates two geographic segments: Europe and Mexico. Selected financial information for each segment is found in Exhibit 3.



At the beginning of 2009, Delicious entered into an operating lease for manufacturing equipment. At inception, the present value of the lease payments, discounted at an interest rate of 10%, was 6300 million. The lease term is six years and the annual payment is 669 million. Similar equipment owned by Delicious is depreciated using the straight-line method and no residual values are assumed.

Scott gathers the information in Exhibit 4 to determine the implied "stand-alone" value of Delicious without regard to the value of its U.S. associate.




If Delicious were to treat the operating lease as a finance lease, its interest coverage ratio for 2009 would be closest to:

Delicious Candy Company (Delicious) is a leading manufacturer and distributor of quality confectionery products throughout Europe and Mexico. Delicious is a publicly-traded firm located in Italy and has been in business over 60 years.

Caleb Scott, an equity analyst with a large pension fund, has been asked to complete a comprehensive analysis of Delicious in order to evaluate the possibility of a future investment.

Scott compiles the selected financial data found in Exhibit 1 and learns that Delicious owns a 30% equity interest in a supplier located in the United States. Delicious uses the equity method to account for its investment in the U.S. associate.


Scott reads the Delicious's revenue recognition footnote found in Exhibit 2.
Exhibit 2: Revenue Recognition Footnote
_________________________in millions______________________________Revenue is recognized, net of returns and allowances, when the goods are shipped to customers and collectability is assured. Several customers remit payment before delivery in order to receive additional discounts. Delicious reports these amounts as unearned revenue until the goods are shipped. Unearned revenue was €7,201 at the end of 2009 and €5,514 at the end of 2008.

Delicious operates two geographic segments: Europe and Mexico. Selected financial information for each segment is found in Exhibit 3.


At the beginning of 2009, Delicious entered into an operating lease for manufacturing equipment. At inception, the present value of the lease payments, discounted at an interest rate of 10%, was 6300 million. The lease term is six years and the annual payment is 669 million. Similar equipment owned by Delicious is depreciated using the straight-line method and no residual values are assumed.

Scott gathers the information in Exhibit 4 to determine the implied "stand-alone" value of Delicious without regard to the value of its U.S. associate.



Using the data found in Exhibit 1 and Exhibit 4, Delicious's implied P/E multiple without regard to its U.S. associate is closest to:

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.

Voyager used the pooling of inierests method when accounting for the 2000 acquisition of Dragon, rather than the acquisition method it would use today. Which of the following is least likely a feature of the pooling of interests method?