# Thread: Free CFA Level 2 practice question bank for June 2011 exam

1. I think it's A.

2. Q23 Ans A:

From the table below we can work out the premium paid, take the average of the premium paid and apply that on the current stock price of Salem.

Durgapur------------------------------\$20----------------------------------\$25------------------------25
Rourkela-------------------------------\$25----------------------------------\$28-----------------------12
Bellary---------------------------------\$15----------------------------------\$18-----------------------20

Applying premium of 19% on the stock of Salem steel we get the price as \$12 * 1.19 = \$14.28

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Today's Question (Questions and answers provided by Knowledge Varsity)

Q24. Which of the following is most likely the price using comparable transaction approach?

A. \$11.60
B. \$13.55
C. \$13.19

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3. Q24 Ans B:

To value the same, following are the steps.
1. We should come up with the P/E, P/S and P/B ratio on the acquisition price.
2. Take the average of P/E, P/S and P/B of all the 3 companies
3. Multiply the average P/E ratio to that of the EPS of Salem to find the price.
4. Do the step 3 for all other ratios
5. Take the average of all the prices.

Following table summarizes the approach
Item------------Durgapur-----------Rourkela------------Bellary---------Average
--------------------------\$25--------------------\$28-------------------\$18
P/E---------------------8.0645---------------7.7778-----------------8.5714-------------8.1379
P/S---------------------1.9231---------------1.8667-------------------2-----------------1.9299
P/B---------------------1.7857---------------2.1538-----------------2.5714-------------2.1703

Item------------Average------------------Salem Steel---------------- Multiplied Value (for Salem)
P/E------------------8.1379------------------------EPS-------\$2-------------------------\$16.2758
P/S------------------1.9299-----------------------Sales------\$7-------------------------\$13.5093
P/B------------------2.1703-------------------Book Value----\$5-------------------------\$10.8515
Average Value (for Salem)---------------------------------------------------------------\$13.5455

So the average value of the stock of Salem steel is 13.5455 or 13.55

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Today's Question (Questions and answers provided by Knowledge Varsity)

Q25. How much would be the gain to the shareholders of Vizag steel if the acquisition is done at \$13.5 per share in all cash deal?

A. \$100 million
B. \$25 million
C. \$75 million

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4. I was wondering regarding the current vignette as to whether this a test of corporate finance and equity valuation or just one of them. Many of the methods used so far seem to be unfamiliar as part of the CFA curriculum.

5. Q25 Ans B:

Since the synergy value is \$100 million, it will be distributed to Salem’s shareholders and Vizag’s shareholders.

Value of Vizag before acquisition = 30 * 100 = \$3000 million
Value of Salem before acquisition = 12 * 50 = \$600 million
Post acquisition value of Vizag = (\$3000 + \$600 + \$100 - \$675) = \$3025
Gain to Vizag = \$3025 - \$3000 = \$25 million

A shortcut method would be:-
100 million is the synergy divided between the 2 companies and Salem shareholder are gaining (675-600) = 75million of that. So the remaining 25 million will go to Vizag shareholders.

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Today's Question (Questions and answers provided by Knowledge Varsity)

Q26. With regards to Mr. Bhushan’s argument, evaluate whether the suggestion given by Mr. Bhushan is better for the shareholders of Vizag steel or not?

A. The shareholders of Vizag steel will get benefitted
B. The shareholder of Vizag steel will lose
C. It doesn’t matter if the deal is a cash deal or a cash and stock deal as suggested by Mr. Bhushan

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6. Q. 26 b

7. Q 26. I believe the shareholders would be worse off with a cash and stock deal. The gain to them will be reduced and therefore the answer is B.

8. Q26. Ans B:

Let’s evaluate the proposed deal by Mr. Bhushan
Cash value = \$500 million
No of shares to be issued = \$50 million / 8 = 6.25 million
Value of Vizag steel after acquisition = (\$3000 + \$600 + \$100 - \$500) = \$3200 million
Share price of Vizag steel post acquisition = \$3200 million /(100 + 6.25) = \$30.1176
Value of payment in the form of Vizag’s shares will be = \$30.1176 * 6.25 = \$188.2353 million
Total payment = \$500 + \$188.2353 = \$688.2353 million

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Today's Question (Questions and answers provided by Knowledge Varsity)

Q 27. Analyze whether Mr. Lakhani’s concern are valid or not?

A. Mr. Lakhani’s concern is valid as the HHI index is high
B. Mr. Lakhani’s concern is not valid as the HHI index is very low
C. There is no relationship with the market concentration and the government policy

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9. The answer is A as the HHI index as a result of vizag and Salem merger goes above 0.18 to 0.19 which indicates high concentration in the industry.

Prior to the merger, the HHI index was moderate at 0.165.

10. [COLOR="darkred"]Q27 Ans A:

For analyzing this we need to find out the HHI index of the industry pre and post acquisition.

Pre acquisition HHI = 1002 X (2X25%2+15%2+ 7 X 5%2) = 1650
Post acquisition HHI = 1002 X (30%2+25%2+15%2+ 6 X 5%2) = 1900

A greater than 1800 HHI will mean that the regulator will take action and will not allow the merger to happen; hence Mr. Lakhani