CFA Level 2 Flashcards
What is a foreign currency?
Any currency that differs from a subsidiary’s functional currency.
Where do translation gains/losses show up under the current rate method?
Equity section of the balance sheet.
Where do translation gains/losses show up under the temporal method?
On the income statement.
When do you use the temporal method?
When subsidiaries have the same functional currency as the parent.
When do you use the current rate method?
When foreign subsidiaries use a foreign currency as their functional currency.
What happens in a statutory merger?
The target company ceases to exist.
What happens in a consolidation?
Both companies cease to exist.
What’s the formula for Economic Value Added?
(EBIT + Capitalized expenses) x (1 - tax rate) - (Cost of capital x total invested capital)
What is the formula for justified price-to-book?
(ROE - g) / (r - g)
What is another name for credit spread?
G spread
What are the BSM model assumptions?
- Stock prices are normally distributed
- The natural log of the returns are normally distributed.
- The risk-free rate and the volatility of the underlying are assumed to be constant.
What is the formula to find the mean reversion level?
Bo / (1 - b1)
What’s the formula to find plan assets?
Previous year x (1 + actual return rate) + contributions - benefits paid
What’s the formula to find PBO?
PBO beginning of the year x (1 + discount rate) + benefits earned - benefits paid
What’s the formula to find periodic pension cost?
Current service cost + interest cost + past service costs - actuarial gains + actuarial losses - actual return on plan assets
Current service costs = pension benefits earned
Interest cost = PBO x discount rate
