CFA I set 1
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What are financial statement notes (footnotes)?,1) details about the information summarized in the financial statements
 2) summarize accounting methods and assumptions, estimates, contingencies, acquisitions and disposals.
 3) *They are audited.*
 4) discuss the fiscal period covered by the statements and the inclusion of consolidated entities
 5) additional information on items such as business acquisitions or disposals, legal actions, employee benefit plans, contingencies and commitments, significant customers, sales to related parties, and segments of the firm
 What is management's commentary (MD&A)?,*required to discuss *
 1) trends, significant events and uncertainties that affect the firm's liquidity, capital resources and results of operations
 2) effects of inflation
 3) impact of offbalancesheet obligations and contractual obligations
 4) accounting policies that require significant judgement by management
 5) forwardlooking expenditures and divestitures

*not required to discuss*
 1) discontinued operations
 2) extraordinary items, and other unusual or infrequent events

What is the formula for doubledeclining balance?,= *2 / depreciable life in years x book value at beg of year*; *does not use salvage value but depreciation stops when residual value has been reached*
 Where are discontinued operations reported?,same for both US GAAP and IFRS; must be physically and operationally distinct from the rest of the firm; management has decided to dispose of but either hasn't done so or did dispose of in the current period after the operation had generated income or losses; reported separately in the income statement, net of tax, after income from continuing operations; should be excluded by the analyst when forecasting future earnings
 What are extraordinary items?,US GAAP: *unusual AND infrequent items*; reported separately net of tax and appears on the income statement below discontinued operations
 IFRS: *does not allow extraordinary treatment in the income statement
 What are unusual or infrequent items?,events which are either unusual in nature or infrequent in occurrence but not both; included in income from continuing ops & reported before tax.
 EX:
 1) G/L from from sale of assets or part of business
 2) Provisions for environmental remediation, impairments, writeoffs, writedowns, restructuring.
 3) Integration expense for recently acquired business
 What is the basic EPS formula?,net income  preferred dividends
 
 weighted avg of common shares out
 What is the diluted EPS formula?,= net income
  [preferred dividends]
 + [*convertible* prf.dividends]
 + [*convertible* debt int.] (1t)
 
 (weighted avg. of c/s o/s)
 + (shares from conversion of conv. pfd. shares)
 + (shares from conversion of conv. debt)
 + (shares issuable from stock options)

x Asset TO
 x Leverage Ratio
 
 = (NI/Sales)
 x (Sales/Assets)
 x (Assets/Equity)
 What is the extended fivepart ROE DuPont formula?,[NI / EBT]
 x [EBT / EBIT]
 x [EBIT / revenue]
 x [revenue / total assets]
 x [total assets / total equity]

What are the maximum and minimum values for a American call option?,Min: C ≥ MAX[0, S  [X / (1+RFR)^Tt]]
 Max: S
 What are the maximum and minimum values of a American put option?,Min: P ≥ MAX[0, XS]
 Max: X
 What is the general formula for interest rate swaps?,(fixed rate  floating rate) x (days/360) x notional
 If the netfixed payment is positive ...,the fixed pays, floating receives
 If the netfixed payment is negative ...,the floating pays, fixed receives
 What is the cost method?,value is determined by the *replacement cost* of improvements plus an estimate for the value of the land
 What is the sales comparison method?,value is determined by the price of a *similar property* or properties from recent transactions
 What is the income method?,uses a discounted cash flow model to estimate the present value of the future income produced by the property; this method uses NOI (net operating income) divided by estimated market required rate of return (or cap rate). Ignores changes to NOI and does not take in to account an investors income tax implications
 How do you calculate NOI?,= rental income x (1  vacancy rate)
  insurance costs
  property taxes
  utility expense
  repair / maintenance costs

*no financing cost or depreciation when calculating NOI*
 What is the discounted aftertax cash flow method?,net present value of an investment equals the present value of aftertax cash flows, discounted at the investor's required rate of return, minus the equity portion of the investment. Only projects w/a NPV > 0 should be accepted.
 What are the stages of venture capital investing?,1) *seed stage*: provide capital for r&d
 2) *early stage*
 a) startup financing: complete product development
 b) first stage financing: refers to the funding of the transition to commercial production and sales of the product
 3) *formative stage*
 4) *later stage*: company is still private, company needs second and third stage financing. Third stage financing would fund a major expansion of the company. *Mezzanine or bridge financing would enable a company to take the steps necessary to go public*
 How do calculate whether to invest in a startup?,1) estimate probability of failure for each year until a payment is expected
 2) take each probability and subtract it from 1 and multiply them all together: this is the probability of success
 3) discount the expected payout to the present and multiply that value by the probability of success (value from #2)
 4) subtract probability of success from 1 to get the probability of failure and multiply that value by the initial cash outlay
 5) add the two numbers together:
 *[PV x P(success)] + [CF0 x P(failure)]*
 How do you calculate aftertax cash flows?,=NOI
  Depreciation
  first mtge payment
 
 = blah x (1  marginal income tax rate)
 
 = aftertax blah
 + depreciation
  (mtge payment  (amt borrowed * mkt rate of interest))
 What are the three sources of return for a commodity investment?,1) *Collateral yield*: the return on the cash used as margin
 2) *Roll Yield*: the return from rolling forward the maturity
 3) *Spot price*: changes to the price
 What are the capital budgeting principals?,1) decisions are based on cash flows, not accounting income
 2) Cash flows based on opportunity costs & taxes
 3) timing of cash flows is important
 4) Cash flows are analyzed on *aftertax basis*
 5) *financing costs are reflected in the projects required rate of return and thus should not be included in incremental cash flows.*
 What is the discounted payback period?,uses present values of the projects estimated cash flows. Number of years it takes a project to recover its initial investment in PV terms and must be greater than the payback period without discounting. This method ignores terminal values.
 What are NPV profiles?,graph that show's a project's NPV for different discount rates; yaxis=NPV
 xaxis=cost of capital/discount rate
 *when profile touches xaxis NPV = 0*
 What is the crossover rate?,*point where two project's NPV's are equal*. Usually need to find mystery initial cash outflow for a project.
 1) Find NPV for project w/all known cash flows. 2) set initial cash outflow for unknown project to 0 and calculate NPV
 3) subtract that value from other project's NPV
 What is project sequencing?,an investment in a project today that creates the opportunity to invest in other projects in the future
 What is capital rationing?,The situation where a firm has more positive NPV projects than its available budget can fund. It must choose a combination of those projects that maximizes shareholder wealth.
 What is the WACC formula?,(Wd) [Kd (1t)] + (Wps)(Kps) + (Wce)(Kce)

Wd = % of debt in cap structure
 Wps = % preferred stock in cap structure
 Wce = % C/S in cap structure
 What are the three methods of determining cost of equity?,1) *CAPM*: Kcs = RFR +β [E(Rm)  RFR]
 2) *(Div / P0) + growth rate* (sometimes you will have to add growth to the dividend if it's going to be paid in the future)
 3) *Addon yield* method (bond yield + addon rate)
 What is the CAPM formula?,Kcs = RFR +β [E(Rm)  RFR]
 What is the CAPM with country risk premium (CRP)?,Kce = RFR + β [E (Rmkt)  (RFR + CRP)]
 What are the two dividend discount model formulas?,1) Po = D1 / [Kce  g]
 2) Kce = (D1 / Po) + g

What is the equalweighted index formula?,arithmetic average *of the returns* of each component in the index; disadvantage: period rebalancing (similar to priceweighted); weights placed on returns of the securities of smaller cap firms are greater than their proportions of the overall market value of the index stocks
 What is a total return index?,uses both price return and interim cash flows to calculate return; *always greater than price return index*
 What is weak form market efficiency?,1) prices fully reflect all currently available security mkt data
 2) price chgs are *independent* from one period to the next.
 3) *TA will not work.*
 What is semistrong form market efficiency?,1) prices fully reflect all publically available security mkt data
 2) prices do include past security mkt info plus nonmkt info available to the public
 3) timing of *news announcements are independent* of each other
 4) large # of profit maximizing participants
 5) *FA will not work*
 What is strongform market efficiency?,1) prices fully reflect all *public and private sources* (perfect market)
 2) *all info is reflected, past, public and private (inside)*
 3) no group has a monopoly on info
 4) noone should be able to consistently achieve abnormal returns
 5) assumes cost *free availability* of all information
 What does market efficiency assume?,it does not assume that individual market participants correctly estimate asset prices, but does assume that their *estimates are unbiased*. That is, some agents will overestimate and some will underestimate, but they will be correct, on average
 What are the 5 most important external factors influencing industry growth?,1) *macro*  cyclical or structural; interest rates; credit availability; inflation; education leading to productivity
 2) *technology*  increases in productivity
 3) *demographic*  age distribution and size
 4) *governments*  taxes and regulation
 5) *social influences*  relate to how people work, play, spend money
 What are the five phases of industry life cycle?,1) *embryonic*: slow growth, high prices, large investment needed, high risk of failure
 2) *growth*: rapid growth, limited competition, falling prices
 3) *shakeout*: growth has slowed, intense competition, industry overcapacity, declining profitability, cost cutting, increased failures
 4) *mature*: slow growth, consolidation, high barriers to entry, stable pricing, superior firms gain market share
 5) *decline*: negative growth, declining prices, consolidation
 What is the oneyear holding period DDM?,value of stock *TODAY* is PV of any dividends during the year plus the PV of the expected price of the stock at the end of the year (terminal value); *be sure to use the expected dividend*
 What is the multiperiod DDM?,discount all dividends to present as well as a "perpetuity" value; don't forget to discount the "perpetuity" value to the present as well. add dividends and perp value together; *appropriate for rapidly growing companies*
 What is the earnings multiplier model (justified P/E formula)?,= [D1 / E1] / (k  g)
 = payout / (k  g)
 According to Markowitz, an investor's optimal portfolio is determined where the?,investor's highest utility curve is tangent to the efficient frontier
 What are the 3 steps in the portfolio management process?,1) *Planning*: IPS
 2) *Execution*: topdown or bottom up analysis, security selection
 3) *Feedback*: monitor changes with client and rebalance portfolio, evaluate performance relative to benchmark portfolio identified in the IPS
 How do you calculate covariance between two assets?,1) put return data into calculator using 2nd data func to find mean
 2) find difference between each period's value and each sets mean
 3) take period A's difference and multiply it by period B's
 4) sum all the values up
 5) *divide by n 1*
 What is the formula for correlation coefficient?,(Cov of A, B)
 
 (STD of A) x (STD of B)

2) 6year spot rate
3) formula:

= [ (1 + z6)⁶ / (1 + z3)³ ]  1
How do you calculate reinvestment income?,EX: how much reinvestment income would soandso need to earn over X years to achieve a compound rate of return of Y?

What is the financial account of?,1) govtowned assets abroad
 2) foreign owned financial assets with the reporting country
 What is the equation representing the relationship between trade deficit, saving and domestic investment?,X  M = private savings + government savings  investment
 X  M = (T  G) + (S  I)
 How do you calculate ending inventory?,ending inventory = beginning inventory + purchases  COGS
 What is the base currency?,currency in the denominator
 What is the price currency?,currency in the numerator
 The foreign currency is the base currency for a?,direct quote (foreign currency in denominator)
 The home currency is the base currency for a?,indirect quote (home currency in denominator)
 What is the interest rate parity formula?,forward rate = spot rate x (1+domestic rate / 1+foreign rate)
 If USD/EUR spot exchange rate is 1.3500 and 6month forward points are −75, the 6month forward exchange rate is:,1.3425, USD = forward premium, EUR = forward discount; in 6 months 1 Euro will only buy 1.3425 instead of 1.3500, so currently it is at a premium
 If RFR goes up,puts: go down
 calls: go up
 If RFR goes down,puts: go up
 calls: go down
 How are lease payments accounted for?,whether a lease is an operating or a finance lease, both GAAP and IFRS require disclosure of the minimum lease payments *for each of the next five years and the sum of minimum lease payments more than five years in the future*