Q3. Nicole Zimmerman, CFA, is a portfolio manager for an investment firm in New York. She is considering purchasing common

shares in Montserrat Inc., a publicly traded residential home builder in the Southwest U.S. Zimmerman believes the company is

currently undervalued due to investors’ disappointment in Montserrat’s earnings over the past several years after the acquisition

of a competitor, American Homes. Zimmerman’s opinion is that any difficulties lingering from the 2000 acquisition should be

over now, and is anticipating high levels of growth for the company in the foreseeable future.

Zimmerman reviews past and current financial statements of Montserrat, paying careful attention to the 2000 acquisition. It is noted that the acquisition was an all-equity transaction, and was accounted for under the pooling of interests method. Both Montserrat and American Homes were profitable prior to the acquisition. At the time of the transaction, the fair market value of American Home’s assets was approximately 10% higher than book value.

In addition, unknown to Zimmerman, the management of Montserrat is currently considering the acquisition of another smaller competitor, Hometown Homes. Montserrat’s proposed $25 million cash offer to the owners of Hometown increases Montserrat’s existing share ownership to over 50% of the company (HHI to 700 from 600). Montserrat had reviewed the possibility of repurchasing its own shares in the market at the currently depressed price, but determined that pursuing this acquisition of Hometown Homes would allow them to enter a new geographic market and would present a very attractive growth opportunity. Should they move forward with the acquisition, the management of Montserrat believes that investors will see the move as a positive, and it will have a buoying effect on its stock price.

Montserrat’s planned acquisition of Hometown Homes must be approved by shareholder vote, and management anticipates that approval will be obtained. However, as a contingency plan, Montserrat has explored the possibility of entering into a joint venture with Hometown and financing it through the establishment of a special purpose entity (SPE). Montserrat would supply the initial equity investment representing approximately 10% of the transaction, and would finance the remainder through the issuance of debt. In addition, Montserrat would have to guarantee the debt of the new entity, but would receive 85% of future earnings generated by the SPE.

The pooling of interests method of accounting for acquisitions has several significant differences from the purchase method. Which of the following is the most significant difference between the two methods? Under the pooling of interests method:

A)   the two companies are combined using their prevailing fair market values.

B)   operating results prior to the acquisition are not restated, and therefore pre-and post-acquisition financial statements are not comparable.

C)   assets and liabilities of the two firms are combined, and neither company is considered to have acquired the other.

Q4. If Montserrat had elected to account for the American Homes acquisition using the purchase method rather than the pooling of

    interests method, the company’s:

A)   return on assets would be higher because net income and assets are higher.

B)   return on assets would be lower because net income is lower but assets are the same.

C)   profit margin would be lower because net income is lower but sales are the same.

Q5. If Montserrat purchases the proposed $25 million position in Hometown Homes, which of the following accounting methods for

    intercorporate investments should be applied?

A)   Consolidation method.

B)   Cost method.

C)   Equity method.

答案和详解如下：

Q3. Nicole Zimmerman, CFA, is a portfolio manager for an investment firm in New York. She is considering purchasing common

shares in Montserrat Inc., a publicly traded residential home builder in the Southwest U.S. Zimmerman believes the company is

currently undervalued due to investors’ disappointment in Montserrat’s earnings over the past several years after the acquisition

of a competitor, American Homes. Zimmerman’s opinion is that any difficulties lingering from the 2000 acquisition should be

over now, and is anticipating high levels of growth for the company in the foreseeable future.

Zimmerman reviews past and current financial statements of Montserrat, paying careful attention to the 2000 acquisition. It is noted that the acquisition was an all-equity transaction, and was accounted for under the pooling of interests method. Both Montserrat and American Homes were profitable prior to the acquisition. At the time of the transaction, the fair market value of American Home’s assets was approximately 10% higher than book value.

In addition, unknown to Zimmerman, the management of Montserrat is currently considering the acquisition of another smaller competitor, Hometown Homes. Montserrat’s proposed $25 million cash offer to the owners of Hometown increases Montserrat’s existing share ownership to over 50% of the company (HHI to 700 from 600). Montserrat had reviewed the possibility of repurchasing its own shares in the market at the currently depressed price, but determined that pursuing this acquisition of Hometown Homes would allow them to enter a new geographic market and would present a very attractive growth opportunity. Should they move forward with the acquisition, the management of Montserrat believes that investors will see the move as a positive, and it will have a buoying effect on its stock price.

Montserrat’s planned acquisition of Hometown Homes must be approved by shareholder vote, and management anticipates that approval will be obtained. However, as a contingency plan, Montserrat has explored the possibility of entering into a joint venture with Hometown and financing it through the establishment of a special purpose entity (SPE). Montserrat would supply the initial equity investment representing approximately 10% of the transaction, and would finance the remainder through the issuance of debt. In addition, Montserrat would have to guarantee the debt of the new entity, but would receive 85% of future earnings generated by the SPE.

The pooling of interests method of accounting for acquisitions has several significant differences from the purchase method. Which of the following is the most significant difference between the two methods? Under the pooling of interests method:

A)   the two companies are combined using their prevailing fair market values.

B)   operating results prior to the acquisition are not restated, and therefore pre-and post-acquisition financial statements are not comparable.

C)   assets and liabilities of the two firms are combined, and neither company is considered to have acquired the other.

Correct answer is C)

The pooling method treats the transaction more as a merger, while the purchase method more closely resembles an acquisition.

Q4. If Montserrat had elected to account for the American Homes acquisition using the purchase method rather than the pooling of

    interests method, the company’s:

A)   return on assets would be higher because net income and assets are higher.

B)   return on assets would be lower because net income is lower but assets are the same.

C)   profit margin would be lower because net income is lower but sales are the same.

Correct answer is C)

In general, performance measures are more favorable using the pooling method rather than using the purchase method. In this example, under the purchase method, net income declines because depreciation expenses are increased as tangible assets are written up to their market value at the time of the transaction.

Q5. If Montserrat purchases the proposed $25 million position in Hometown Homes, which of the following accounting methods for

    intercorporate investments should be applied?

A)   Consolidation method.

B)   Cost method.

C)   Equity method.

Correct answer is A)

A purchase that represents an ownership stake of 50% or more in another entity represents a controlling influence of the acquiring company over the acquisition, and should be accounted for using the consolidation method.

Thanks

三级考试重要教材《期权、期货和其它衍生产品》

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