Question Bank Flashcards
January 1 100,000 common shares outstanding
March 1 2 for 1 stock split
August 1 10% stock dividend
100,000 × 2 × 1.1 = 220,000.
If convertible preferred stock is dilutive, the preferred dividends that would not have been paid if the preferred stock is converted must be added back to the numerator. Note that any nonconvertible preferred stock dividends are still subtracted from net income in the numerator.
Venture capital providers invest in firms that are early in their life cycles. Stages of venture capital financing include seed stage, early stage, and mezzanine financing. In a leveraged buyout, an investor purchases all of a public firm’s equity, taking the firm private. In a private investment in public equity (PIPE), an investor purchases private equity issued by a public firm.
Information directly from the company (e.g., annual or quarterly regulatory filings, investor presentations, press releases, investor relations department, website)
Publicly available third-party information (e.g., analyst reports, government research and reports, news outlets, social media)
Proprietary third-party information (e.g., analyst reports, Bloomberg)
Proprietary primary research, performed or commissioned by the analyst (e.g., surveys, market studies)
Diluted EPS = [(Net income − Preferred dividends) + Convertible preferred dividends + (Convertible debt interest)(1 − t)] / [(Weighted average shares) + (Shares from conversion of conv. pfd shares) + (Shares from conversion of conv. debt) + (Shares issuable from stock options)]
credit cycles are longer durations than business cycles
increase in fiscal deficit to GDP is a concern because government spending did not lead to more private investment (gov spending increase, IR increase, private investment decrease=crowding out)
impairment goes through operating loss in IS
warrant is dilutive if excercise price<average price
ignore end price, release x shares on market and buyback y amount of shares to avoid too much share issuance; the difference is change in CS, no change to numerator
stock div and stock split goes to beg of the year or day when issued
basic EPS=(NI-convertiblePS)/common stock;
10,000 convertible bonds (conversion ratio is 20 to 1)=>10,000*20=200,000 shares of common stocks;
customer credit quality is improving=paying receivables faster
significance level=type 1 error=significance level of a test is 5% will yield the correct decision about the null hypothesis 95% of the time; does not mean: yield the correct decision about the null hypothesis 95% of the time!!!
power of the test=1-type 2 error
sign of LIFO liquidation, inventory units go down;
LIFO reserve=COGS FIFO-COGS LIFO; lifo reserve decrease when price decrease
Protect domestic industries by placing restrictions on inflows of foreign capital to prevent invasion
dynamic price=peak vs down time;
tiered pricing=charge less when different quantities bought
prepare a sales-based pro forma company model use BS and IS (can derive CF stmt)
RSF ratio=sets a minimum required return for a given level of risk, the greater the RSF ratiom the the probability of the portfolio’s return dropping below a threshold level is reduced
equity investment without significant control = trading securities
GAAP=FV and g&l on IS
IFRS=may record g&l on IS or may elect at the time of purchase to report FV and g&l @ OCI
if short selling is restricted, market value will be consistently higher than intrinsic value cuz not allowed to sell and drop the price
if firm is unprofitable, an earnings multiplier model or a dividend discount model wont work cuz no earnings; use asset-based model.
price-to-sales ratio can be used for firms with negative earnings and internally generated intangibles.
price-to-earnings ratio cant use for negative earnings
price-to-book value ratio does not recognize value of nonphysical assets such as human capital or internally generate intangible assets cuz int intangibles are expense, not on BS
increase in YTM, reaches a flatter part of the price-yield curve, changes in yield has smaller effects on value hence less interest rate risk
benefits of derivative markets= discover information that is not available from cash market transactions, such as implied volatility from options markets.
soft lockup period=period after initial investment during which there are significant penalties for redemptions;
lockup period=redemption requests will not be honored for a period after initial investment
efficient market theory=investors should not earn CONSISTENT superior returns from technical trading rules such as a contrary opinion strategy; bset strategy is passive management as active management will have fees
if its a soft hurdle rate and already achieved, no need to do anything for soft hurdle. just deduct the high water-mark
Convenience yield=benefit of holding physical commodities, not commodity derivatives. Positive correlation with inflation makes commodity derivatives useful as a hedge against inflation. Derivatives pricing is more transparent compared to pricing of physical commodities due to standardized
duration gap=MACAULAY duration - investment horizon; modified duration=mac duration/(1+YTM)
commodity indexes are futures, cant be replicated by buying underlying commodities
beta=cov/VARIANCE of the market
GO bonds = backed by the full faith and credit of the issuing government (no collateral so like unsecured), but they are safe so senior; serviced by government revenues such as taxes
collateral is SECONDARY source of repayment for secured bond; CF is primary for both secured and unsecured bond
A+ is below AA
BB is below BBB–
pure discount bond has no coupon
discount bond: Coupon < Current Yield < YTM < YTC; YTC highest because early calling a bond that will be discounted in future
premium: Coupon Rate > Current Yield > YTM > YTC
solvency risk=A<L
Hyperbolic discounting= (self control bias, immediate gratification) favoring small payoffs in the short term over larger payoffs in the long term;
self-attribution bias=investor who takes personal credit for gains and blames others for losses exhibits self-attribution bias.
loss aversion bias=investor who experiences greater pain from a loss than pleasure from an equal-sized gain
dual-currency bond= Bonds that pay coupons in a different currency than their principal
Equal-weighted index require rebalancing the most (after each return period) cuz differences in returns among securities will drive the security weightings away from equal weighting.
Changes in the security prices automatically adjusted by the weights in price- and value-weighted index portfolios
The price returns of a price-weighted index mirror the returns on a portfolio with an equal number of shares of each security. An equal-weighted index mirrors the returns on a portfolio with the same money amount invested in each security. A market capitalization index mirrors the returns on a portfolio with security weights proportional to the market capitalizations of each constituent
preferred stock’s value=dividend/required return
operationally efficient = low transactions costs.
informationally efficient = prices reflect new information rapidly
allocationally efficient = resources are allocated to their most productive use
soft-bullet covered bond=default and payment acceleration are delayed to a new maturity date if payments are not made as originally scheduled.
hard-bullet covered bond=default and payment acceleration are triggered if payments are not made
conditional pass-through covered bond=bond is converted into pass-through securities at the initial maturity date if payments are not made as originally schedule (cash generated directly pass on to investors)
casualty insurers are characterized by short-term time horizon and low risk tolerance
individual loan level protection=Prepayment lockout periods and defeasance
structural call protection=sequential-pay tranches where principal amount of each successive tranche must be repaid in full before principal on the next successive tranche can be paid
lowest to highest riskiness: Infrastructure debt, senior real estate debt, unitranche debt, mezzanine debt, private equity co-investments, and venture capital.
Risk shifting=changing the distribution of potential risk of outcomes.
Risk transfer = another party bears some or all of the risk (insurance)
weak form efficient=technical analysis and past info not work;
semi-strong=fundamental analysis and public info not work;
strong=private info not work; best is passive strategy as cant consistently generate abnormal (more then expected) return; save managing fee
Overconfidence bias occurs, reduce by sharing forecasts with others, widening confidence intervals (greater degree of uncertainty) and using scenario analysis
harmonic mean<geomatric mean<arithmetic mean
geomatric=sqrt(harmonix*arithmetic)
Financial statement analysis is typically done by EXTERNAL people outside a company (Assigning credit ratings to the company’s debt, Forming an opinion of the company’s ability to earn future profits)
not for internal people Making decisions about the everyday operations of the business
currency board arrangement=country retains its own currency but commits to exchange it at a fixed ratio for a foreign currency
real P/B exchange rate=nominal P/B exchange rate×(CPI base currency)/(CP price currency)
100 JPY/EUR=>104.2 JPY/EUR, EUR appreciated by 4.2% (1unit of euro)
returns are identically distributed=mean and variance (therefore sd) are stationarity, which means they do not change over time.
BOD=set compensation for a firm’s senior managers and establish a strategic direction
Senior management=manage the budget during the fiscal year. develope operational goals and objectives to carry out the strategy is management’s responsibility.
g&l is on asset sale is not a cash flow, only proceed and purchase are cash flow and deferred tax
Nonparametric tests=not testing a population parameter (mean, sd, etc) and not making assumptions about population
CV (relative dispersion)= standard deviation / sample mean
Either the direct or indirect method may be used for reporting cash flow from operating activities. It is noteworthy, though, that the direct method is encouraged. However, unlike under IFRS, a reconciliation of net income to cash flow from operating activities must be provided regardless of the method used.
Text analytics= analyze unstructured data in text (or voice) forms, for example identifying how often a word appears in a report.
Corporate exhaust = potentially useful data that businesses generate from retail transactions and bank data.
natural language processing=computers and artificial intelligence are used to interpret human language.
cite a purchased report but no need to cite public government report or public S&P report
Standard VI(C) Referral Fees requires members and candidates to disclose any compensation received for referrals and the nature of the compensation, to their employers and to any clients or prospects they refer to others with the expectation of compensation in any form.
sanctions=public censure, suspension of membership and revocation of CFA charter. CFA Institute does not impose fines
Situational influences external to an individual are claimed to be a more important determinant of ethical behavior than personal traits.
