Block 2: Question block created by wizard

Question
1 of 6

Using Petersen's preferred method and 2013 divisional data, the best conclusion Peterson can make about
which division will potentially become less significant in the future is that it will be:
home furnishings.
recreational products.
children's products.
Claus Petersen, a pension fund equity analyst, is preparing an analysis of Rhine AG for the upcoming
quarterly fund meeting. Rhine is a Germany-based manufacturer that operates three distinct divisions:
childrens products (infant car seats, strollers, cribs, etc.), recreational products (bicycles, bicycle trailers,
etc.), and home furnishings (contemporary furniture). All three divisions sell through retail outlets around the
world.
The company has been pursuing an aggressive growth strategy, achieved through both foreign acquisitions
and organic growth. Petersen is interested in determining how well Rhine is allocating its resources between
the three divisions and the effects of the foreign acquisitions on overall performance. Exhibit 1 summarizes
selected divisional and corporate data for 2013 and 2012.
Exhibit 1
Rhine AG
Selected Divisional and Corporate Data ( millions)
Total for Three
Childrens
Divisions
Products
2013
2012
2013
2012
Revenues
2,837.1
2,775.5
1,176.2
1,236.2
Gross profit
621.4
640.8
296.6
337.6
Operating profit
172.7
219.4
64.7
115.7
Earnings before
136.6
170.0
taxes (EBT)
Net earnings
109.9
132.3
after tax
Total assets
2,498.0
2,479.5
1,270.9
1,249.6
Capital
expenditures
32.7
42.3
22.1
30.0
Proportion of
capital
100%
100%
67.6%
70.9%
expenditures
Proportion of
total assets
100%
100%
50.9%
50.4%

Recreational
Products
2013
2012
1,034.1
930.0
246.0
220.3

Home
Furnishings
2013
2012
626.8
609.3
78.8
82.9

72.9

62.2

35.1

41.5

961.5

948.5

265.6

281.4

6.7

8.6

3.9

3.7

20.5%

20.3%

11.9%

8.7%

38.5%

38.3%

10.6%

11.3%

Petersens preferred method to determine which division is becoming less significant over time is to review
the relationship between capital expenditures and total assets by operating division. He plans to base his
conclusion on the assumption that 2013s investment behavior is representative of future investment patterns.

Petersen knows that revenues in the childrens products division have suffered because of declining birth
rates in Europe and North America, but he believes that if Rhine can maintain the operating margin for this
division then overall company profitability should not be affected.
Corinna Berg, another analyst with the fund, reminds Petersen that during 2013, the U.S. dollar weakened
against the euro by 4% and that 50% of the sales in the recreational products division are sold in the United
States.
Petersen recalls that some of the recent global expansion was aimed at establishing operations in Ireland
because its statutory corporate tax rate is lower than the German rate of 29.8%. If Petersen assumes that
other tax credits were the same in 2013 as 2012, he can analyze changes in Rhines effective tax rate to
determine whether the geographic mix of the companys profits has changed in 2013.
Petersen finally examines the companys liquidity ratios, which are shown in Exhibit 2. Even though the
companys current and quick ratio have improved, his interpretation of the changes in the companys cash
conversion cycle is that the companys liquidity position has deteriorated.
Exhibit 2
Rhine AG
Selected Ratios
Ratio
Current ratio
Quick ratio
Accounts receivable turnover
Inventory turnover
Accounts payable turnover
Cash conversion cycle

2013
2.31
1.06
5.82
3.78
5.71
95 days

2012
2.17
0.89
6.08
3.91
5.78
90 days

2011
1.16
0.53
6.11
4.09
5.60
84 days

Worried that the balance sheetbased and cash flowbased accruals ratios (not shown) raise some concerns
about the possible use of accruals to manage earnings, Petersen asks Berg for advice on what further type of
analysis he should do as a follow-up on this issue.
__________________________________________________________________
Correct.
Petersen prefers to use the relationship between capital expenditures and total assets by operating division
and thus would use the ratio of capital expenditure proportion to total asset proportion for each division. This
ratio for the recreational products division is less than 1 (see the following table), indicating that Rhine is
allocating a lower proportion of capital expenditures to that division relative to asset proportions. If this trend
continues, the recreational products division will become less significant over time.

Proportion of capital
expenditures (Exhibit 1)
Proportion of total assets
(Exhibit 1)

Childrens
Products

Recreational
Products

Home
Furnishings

67.6%

20.5%

11.9%

Total for the

Three
Divisions
100.0%

50.9%

38.5%

10.6%

100.0%

Ratio: Proportion of capital

expenditures to proportion of
total assets

1.3

0.5

1.1

1.0

2014 CFA Level II

Integration of Financial Analysis Techniques, by Jack T. Ciesielski, Jr.
Section 2
Question
2 of 6

If the children's products division had been able to maintain its 2012 operating margin in 2013, the company's
overall operating margin in 2013, compared to 2012, would have been:
the same.
lower.
higher.
Correct.
Apply the 2012 operating margin for the childrens products division to the 2013 revenues for the division to
determine what the 2013 overall operating profit margin would have been if the margin had been maintained,
and then compare it with the 2012 overall operating profit margin.
Operating margin in childrens products in 2012
= Operating profit/revenues
Apply the 9.4% margin to 2013 revenues for division
Increase in 2013 operating profit for division, had the
margin been maintained
Revised 2013 company operating profit with increase in
childrens products operating profit
Revised 2013 company operating margin
2012 company operating margin

115.7/1,236.2
0.094 1,176.2
110.6 64.7

9.4%
110.6
45.9

172.7 + 45.9
218.6/2,837.1
219.4/2,775.5

218.6
7.7%
7.9%

Even if the childrens products division had maintained its operating margin in 2013, the overall company
operating margin would still have decreased slightly (7.7% versus 7.9%).
2014 CFA Level II
Integration of Financial Analysis Techniques, by Jack T. Ciesielski, Jr.
Section 2
Question
3 of 6

Which of the following is the most appropriate use of Berg's reminder about the U.S. versus euro exchange
rate in 2013? Peterson should use the information:
when evaluating management's historical performance.
to determine the exchange gains or losses included in net income.
to confirm that the division's organic growth was less than 11.2%.

Incorrect.
Analysts should consider the foreign currency effect on sales growth for evaluating management's historical
performance. Foreign currency fluctuations are out of management's control, so management should not be
held accountable for the fluctuations when evaluating their performance.
2014 CFA Level II
"Multinational Operations," by Timothy S. Doupnik and Elaine Henry
Section 5.1
Question
4 of 6

The best conclusion Petersen can make about the geographic mix of Rhine's profit in 2013 is that compared
with 2012 the mix is:
about the same.
more domestic.
more international.
Correct.
The 2013 effective tax rate on earnings is lower than in 2012 (see the following table), implying that more
profits were earned in a lower tax jurisdiction. The foreign operations are in lower tax regimes, therefore, it is
reasonable to conclude that more of the profits were earned internationally.
( millions)
Earnings before taxes
Net earnings after tax
Income taxes
Effective tax rate
(Income taxes/EBT)

2013
136.6
109.9
26.7

2012
170.0
132.3
37.7

19.6%

22.2%

2014 CFA Level II

Multinational Operations, by Timothy S. Doupnik and Elaine Henry
Section 4
Question
5 of 6

Compared with 2011, the change in which working capital account most likely had the largest effect on
Petersen's observed deterioration in liquidity?
Accounts payable
Accounts receivable
Inventory
Correct.

Petersen interprets that the changes in the cash conversion cycle (CCC) indicate a deterioration in liquidity.
The CCC has increased since 2011, from 84 days to 95 days (see the following table). The working capital
account that had the largest effect on the increase was inventory because the holding period has increased
6.4 days.
2013
Working Capital Account

Turnover

Days
(365/Turnover
)
Accounts receivable
5.82
62.7
Inventory
3.78
96.6
Accounts payable
5.71
63.9
a
Cash conversion cycle
95.4
a
CCC = Days in sales + Days in inventory Days in payables.

2011
Turnover

Days

6.11
4.09
5.60

59.8
89.2
65.2
83.8

2014 CFA Level II

Integration of Financial Analysis Techniques, by Jack T. Ciesielski, Jr.
Section 2
Question
6 of 6

Berg's best answer to Petersen's question about further analysis is that he should conduct a:
DuPont analysis.
Discounted cash flow analysis.
Cash flow ratio analysis.
Correct.
Concerns about earnings manipulation are best addressed by cash flow ratios, such as operating cash flow
before interest and taxes to operating income.
2014 CFA Level II
"Integration of Financial Analysis Techniques," by Jack T. Ciesielski Jr.
Section 2