| 2008 CFA Level 2 － Mock Exam 2 （PM）模考试题 Q7 (part 1 - Part 6)
Question 7 Evergreen
Brothers is a large producer of bedding plants and shrubs that are sold
to various retail nurseries and home improvement stores located across
the western coast of the United States with approximately $85 million in annual sales. Evergreen grows its products at two facilities, one in Northern California
and the other in the Southern part of the state. Each production
facility currently distributes its products within an approximate 150
mile radius of its location. All aspects of the shipping and delivery
of products have historically been provided by an independent,
third-party distribution company. Because
of impressive growth in the company’s sales over the past several
years, management has decided to pursue plans to bring “in-house” the
distribution of the company’s products. They believe that the projected
decreased freight costs as well as the increased efficiencies in more
actively managing the distribution of their production should
immediately yield increased profit margins. As an initial step,
Evergreen has negotiated the price for ten delivery trucks, which could
provide all distribution capacity needed for the company’s Northern
production facility for the upcoming season. Current plans are to
continue the use of the independent distribution company for the needs
of the firm’s Southern facility for at least the next several years. Under
advice from the company’s CFO, Evergreen has created a new special
purpose entity (SPE), QuickTime, Inc., which will serve as the entity
that will purchase the trucks from the dealer. The purchase will be
financed through a combination of debt and equity, with the dealer
lending 75% of the total cost. The loan is collateralized by both the
trucks and Evergreen’s guarantee of the debt, as required by the dealer. Evergreen
has arranged for an outside investor to provide the remaining 25% of
the upfront costs of the equipment in exchange for 100% of QuickTime’s
nonvoting stock. In addition, the outside investor is guaranteed an 8%
annual return for the life of the financing term. At the end of seven
years, QuickTime will be liquidated and Evergreen will have the option
of purchasing the equipment for its fair value at that time. The
proceeds of the liquidation will be used to repurchase the outside
investor’s stock at par value. In the event that the liquidation value
is insufficient to buy back the outside investor’s stock, Evergreen has
committed to fund the shortfall. Management
has given its tentative approval of the project and the proposed
structure. Questions remain, however, as to the effect of the creation
of QuickTime on Evergreen’s financial statements. With the relatively
recent issuance of FASB Interpretation No. 46(R), “Consolidation of
Variable Interest Entities” (FIN 46(R)), the management of Evergreen
has not had prior experience with the new consolidation requirements
for SPEs. Part 1) Which of the following statements regarding special purpose entities (SPEs) is least accurate? A) In
general, the equity investors in an SPE can expect to receive a limited
rate of return on their investment in exchange for limited risk
exposure. B) An
SPE can be formed to isolate specific assets from the sponsor, thus
lowering the cost of capital by protecting the assets of the SPE in the
event the sponsor experiences financial distress. C) The
entity that absorbs the majority of the risk or receives the majority
of the rewards of an SPE is known as the primary beneficiary. D) An
SPE can be established as one of several legal forms, such as
corporations, partnerships, or trusts, but must establish separate
management from that of the sponsor. Part 2) In
exchange for providing lower-cost financing to an SPE, lenders
typically require additional financial support from a sponsor, which
may be in the form of additional collateral or guarantees. In return,
the sponsor will typically receive which of the following risk and
return profiles? A) Pro-rata share of the actual risk and a pre-determined fixed rate of return on the project. B) Pro-rata share of the actual risks and returns on the project. C) Pro-rata share of the actual returns on the project and a pre-determined fixed level of risk on the project. D) Pre-determined fixed levels of both the risks and returns on the project. Part 3) According
to FIN 46(R), if an SPE is to be considered a variable interest entity
(VIE), it must meet which of the following conditions? A) The
equity investors in the VIE must bear all of the SPE’s risk up to a
pre-determined level as outlined in the governing documents. B) The
SPE must be consolidated by the primary beneficiary, whose status as
primary beneficiary is defined by the level of the firm’s percentage of
voting control. C) The
total at-risk equity of the SPE is not sufficient to finance the
entity’s activities without additional subordinated financial support. D) The equity investors must maintain decision-making rights, which include, but are not limited to, majority voting rights. Part 4) In
order to be considered a VIE under FIN 46(R), an entity must meet
certain conditions. Which of the following statements about QuickTime
is most accurate? Under FIN 46(R), QuickTime is: A) considered a VIE because outside investors share the residual gains and losses at liquidation with Evergreen. B) not considered a VIE because the outside investor does not have any decision making rights. C) considered a VIE because the outside investor’s capital contribution is not sufficient to finance QuickTime’s operations. D) not considered a VIE because the outside investor receives a pre-determined rate of return.
The correct answer was C) considered a VIE because the outside investor’s capital contribution is not sufficient to finance QuickTime’s operations. Part 5) As outlined in FIN 46(R), the primary beneficiary of a VIE is that entity which meets which of the following conditions? A) Holds the majority voting control of the VIE and has separate management from the VIE. B) Has contributed the majority of the capital involved in the formation of the VIE. C) Has exposure to the majority of the loss risks or receives the majority of the residual benefits of the VIE. D) Holds the majority voting control of the VIE and shares management with the VIE. Part 6) Assuming
that QuickTime is considered a VIE in accordance with FIN 46(R), which
of the following statements regarding the consolidation of QuickTime on
Evergreen’s financial statements is most accurate? A) Because
the outside investor holds only nonvoting stock, Evergreen holds the
majority controlling financial interest in QuickTime and must
consolidate QuickTime on its financial statements. B) An
outside investor is a participant in QuickTime’s risks and rewards, so
Evergreen may not consolidate QuickTime on its financial statements. C) Evergreen
is exposed to the majority of QuickTime’s risks and rewards, so
Evergreen must consolidate QuickTime on its financial statements. D) The
truck dealer is supplying the financing for the majority (75%) of
QuickTime’s debt, so Evergreen may not consolidate QuickTime on its
financial statements. | 
发表于 2008-6-6 20:28
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