CFA LEVEL 1 EXAM LATEST EXAM
QUESTIONS WITH GOLDEN TIPS SOLUTIONS
AND REVEIWERS
What part of the pension expense should be reclassified as financing cash flows
for analytical purposes? - ANSWER>>The aftertax amount by which the TPPC
exceeds the employee contributions.
(TPPC - employee contributions) * (1 - t)
Stock options employee compensation expense under the fair value method -
ANSWER>>The expense is allocated between the grant date and the vesting
date. The expense per year is:
Fair value of options when granted / Vestment period requirement
Intrinsic value method for stock option employee compensation -
ANSWER>>Compensation expense is recognized in the income statement only if
the market price of the stock exceeds the exercise price of the option on the
date the option was granted.
Performance stock - ANSWER>>A type of stock grant. It is contingent upon
meeting performance goals such as accounting earnings or other financial
reporting metrics.
Restricted stock - ANSWER>>A stock grant with which the stock cannot be sold
on until the vesting has occured
Stock appreciation rights - ANSWER>>Rights on the gain in the capital
appreciation of the firm's stock. It is different than other stock grants in that no
stock is actually issued and thus no dilution occurs
,Phantom stock - ANSWER>>Similar to stock appreciation rights but different in
that the payoff is based on the performance of a hypothetical stock instead of
the firm's shares
Financial analysis framework - ANSWER>>- Establish objectives
- Collect data
- Process data
- Analyse data
- Developing and communicating conclusions
- Following up
Equivalent annual annuity approach - ANSWER>>Estimate each projects NPV
and convert it to an annual payment. Select the project with the greater annual
payment.
Economic income - ANSWER>>After-tax cash flow - Economic Depreciation
Economic Depreciation = Beginning MV - Ending MV
Economic Profit - ANSWER>>Economic profit = NOPAT - $WACC
Economic profit = EBIT(1-t) - MV Capital * WACC
MM proposition for a capital structure assuming NO taxes - ANSWER>>The
proposition states that the capital structure is irrelevant
V(L) = V(U)
rᵉ = r⁰ + (r⁰ - rᵈ) * Debt/Equity
MM proposition for a capital structure assuming PRESENCE of taxes -
ANSWER>>When the tax assumption is relaxed the optimal capital structure will
be 100% debt as this is the point at which WACC is minimized and thus the
company value is maximized.
V(L) = V(U) + tax rate * Debt
rᵉ = r⁰ + (r⁰ - rᵈ) * (1 - t) * D/E
, Pecking order theory - ANSWER>>Managers prefer borrowing in a way that send
the least visible signals to shareholders. The order of preference is:
Internally generated capital > Debt > Equity
Static trade-off - ANSWER>>Managers try to balance the benefits of debt
borrowing with the costs of financial distress. It states that there is an optimal
structure that has an optimal level of debt
V(L) = V(U) + tax rate * Debt - PV of costs of financial distress
Weighted Average Cost of Capital (WACC) - ANSWER>>WACC = D/V * rᵈ * (1 - t)
+ E/V * rᵉ
Where D & E are the Market Values of Debt and Equity and
V=D+E
Leverage in an international setting - ANSWER>>When evaluating the use of
debt an analyst should be aware of three main factors:
- Institutional and Legal Environment
- Financial Markets and Banking Sector
- Macroeconomic Factors
Effective tax in a dual-taxation system - ANSWER>>effective tax = corporate tax
+ (1 - corporate tax) * income tax
Dividend reliability predictors - ANSWER>>Two ratios are used in this context:
dividend coverage = Net income / Dividends
FCFE coverage = FCFE / (Dividends + Share repurchases)
Statutory merger - ANSWER>>The target ceases to exist and all assets and
liabilities are assumed by the acquirer
Subsidiary merger - ANSWER>>The targets becomes a subsidiary of the acquirer
QUESTIONS WITH GOLDEN TIPS SOLUTIONS
AND REVEIWERS
What part of the pension expense should be reclassified as financing cash flows
for analytical purposes? - ANSWER>>The aftertax amount by which the TPPC
exceeds the employee contributions.
(TPPC - employee contributions) * (1 - t)
Stock options employee compensation expense under the fair value method -
ANSWER>>The expense is allocated between the grant date and the vesting
date. The expense per year is:
Fair value of options when granted / Vestment period requirement
Intrinsic value method for stock option employee compensation -
ANSWER>>Compensation expense is recognized in the income statement only if
the market price of the stock exceeds the exercise price of the option on the
date the option was granted.
Performance stock - ANSWER>>A type of stock grant. It is contingent upon
meeting performance goals such as accounting earnings or other financial
reporting metrics.
Restricted stock - ANSWER>>A stock grant with which the stock cannot be sold
on until the vesting has occured
Stock appreciation rights - ANSWER>>Rights on the gain in the capital
appreciation of the firm's stock. It is different than other stock grants in that no
stock is actually issued and thus no dilution occurs
,Phantom stock - ANSWER>>Similar to stock appreciation rights but different in
that the payoff is based on the performance of a hypothetical stock instead of
the firm's shares
Financial analysis framework - ANSWER>>- Establish objectives
- Collect data
- Process data
- Analyse data
- Developing and communicating conclusions
- Following up
Equivalent annual annuity approach - ANSWER>>Estimate each projects NPV
and convert it to an annual payment. Select the project with the greater annual
payment.
Economic income - ANSWER>>After-tax cash flow - Economic Depreciation
Economic Depreciation = Beginning MV - Ending MV
Economic Profit - ANSWER>>Economic profit = NOPAT - $WACC
Economic profit = EBIT(1-t) - MV Capital * WACC
MM proposition for a capital structure assuming NO taxes - ANSWER>>The
proposition states that the capital structure is irrelevant
V(L) = V(U)
rᵉ = r⁰ + (r⁰ - rᵈ) * Debt/Equity
MM proposition for a capital structure assuming PRESENCE of taxes -
ANSWER>>When the tax assumption is relaxed the optimal capital structure will
be 100% debt as this is the point at which WACC is minimized and thus the
company value is maximized.
V(L) = V(U) + tax rate * Debt
rᵉ = r⁰ + (r⁰ - rᵈ) * (1 - t) * D/E
, Pecking order theory - ANSWER>>Managers prefer borrowing in a way that send
the least visible signals to shareholders. The order of preference is:
Internally generated capital > Debt > Equity
Static trade-off - ANSWER>>Managers try to balance the benefits of debt
borrowing with the costs of financial distress. It states that there is an optimal
structure that has an optimal level of debt
V(L) = V(U) + tax rate * Debt - PV of costs of financial distress
Weighted Average Cost of Capital (WACC) - ANSWER>>WACC = D/V * rᵈ * (1 - t)
+ E/V * rᵉ
Where D & E are the Market Values of Debt and Equity and
V=D+E
Leverage in an international setting - ANSWER>>When evaluating the use of
debt an analyst should be aware of three main factors:
- Institutional and Legal Environment
- Financial Markets and Banking Sector
- Macroeconomic Factors
Effective tax in a dual-taxation system - ANSWER>>effective tax = corporate tax
+ (1 - corporate tax) * income tax
Dividend reliability predictors - ANSWER>>Two ratios are used in this context:
dividend coverage = Net income / Dividends
FCFE coverage = FCFE / (Dividends + Share repurchases)
Statutory merger - ANSWER>>The target ceases to exist and all assets and
liabilities are assumed by the acquirer
Subsidiary merger - ANSWER>>The targets becomes a subsidiary of the acquirer
