What is a confidence interval?

What is the effective duration formula?

What is the standard error of the samplemean?

What is the formula for the standarddeviation of a portfolio of two risky assets?

What is the FRA formula?

What is a DOL (using price and qty)?

-(effective duration) x Δ yield x originalbond price

How do you apply the effective durationwhen given a change in yield and the

effective duration?

(coupon payments x n periods) + bond FV- bond PV

How do you calculate total interestexpense?

(Cov of A, B) -----------------------(STD of A) x (STD of B)

be careful, sometimes the question will include the variance, which is thestandard deviation squared.

What is the formula for correlationcoefficient?

(fixed rate - floating rate) x (days/360) xnotional

What is the general formula for interestrate swaps?

(n-1) / hypothesized valueHow do you calculate a test chi-squared

statistic?

(Wd) [Kd (1-t)] + (Wps)(Kps) + (Wce)(Kce)

Wd = % of debt in cap structureWps = % preferred stock in cap structureWce = % C/S in cap structure

What is the WACC formula?

[1 + EAY] ^ (t / 365) How do you calculate HPY from EAY?

[360 × bank discount yield]-----------------------------------

[360 − (t × bank discount yield)]

How do you calculate the MMY from theBDY?

[NI / EBT] x [EBT / EBIT] x [EBIT / revenue] x [revenue / total assets] x [total assets / total equity]

tax burden x interest burden x EBIT margin x asset turnover x financial leverage

What is the extended five-part ROEDuPont formula?

[nominal GDP in year t / value of year toutput at base year prices] x 100

GDP deflator =

[original cost - salvage value / life inoutput units] x output units in the period

What is the units-of-production method?

[S - TVC - TFC] / [S - TVC - TFC - interest]OR

EBIT / [EBIT - interest]What is the DFL formula?

[S - TVC] / [S - TVC - TFC]What is a DOL (using sales and total

variable cost)?

*= sum of stock prices / number of stocks in index*simple to calculate; downward bias; divisor is adjusted for stocksplits and changes in the composition of the index when securitiesare added or deleted (reconstituted); higher priced stocks havegreater impact than lower priced stocks

What is the price-weighted index formula?

*a component of shareholder's equity* that reports therevaluation upward of an asset's value above its historicalcost; this is not reported on the income statement and isonly allowed under IFRS

What is a revaluation surplus account?

*All investors:*1) Aim to maximize economic utilities2) Are *rational* and risk-averse3) Are broadly diversified across a range of investments4) Are *price takers*; they cannot influence prices5) Can *lend and borrow* unlimited amounts under the risk free rate of interest6) Trade *without transaction* or taxation costs7) Deal with securities that are all *highly divisible* into small parcels8) Assume *all information is available* at the same time to all investors9) All investors have the *same one-period time horizon*10) All investors have the *same risk/return expectations*

What are some assumptions of CapitalAsset Pricing Model (CAPM)?

*beginning book value + interest expense -coupon*

How do you calculate the ending bookvalue of a bond liability?

*Delivery*: seller delivers the good to the buyer*Cash*: buyer and seller exchange the net cash value atthe settlement date. This method is much more common.

What are the methods of settlement for aforward contract?

*net income + other comprehensive income*; includes allchanges in equity except for owner contributions anddistributions (e.g. issuing stock, repurchasing stock, andpaying dividends)

What is the statement of comprehensiveincome?

*plots expected return against standard deviation of returns for efficient portfolios*; the set of portfolios that gives investorsthe highest return for a given level of risk or the lowest risk for a given level of return; *the point at which there are no morebenefits to diversification*; the efficient frontier line bends backwards due to less than perfect correlation between assets; a

*portfolio to the left of the efficient frontier is not attainable*

What is the efficient frontier?

*point where two project's NPV's are equal*. Usually need to findmystery initial cash outflow for a project. 1) Find NPV for project w/all known cash flows. 2) set initial cashoutflow for unknown project to 0 and calculate NPV3) subtract that value from other project's NPV

What is the crossover rate?

*required to discuss *1) trends, significant events and uncertainties that affect the firm's liquidity, capital resources and results of operations2) effects of inflation3) impact of off-balance-sheet obligations and contractual obligations4) accounting policies that require significant judgement by management5) forward-looking expenditures and divestitures

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

*some parts may be unaudited; one of the most useful sections of the annual report*

What is management's commentary(MD&A)?

*subsection in equity* where "other comprehensive income" isaccumulated (summed or "aggregated"); difference between netincome and comprehensive income; *represents certain gains andlosses not recognized in the P&L account.*

What is accumulated other comprehensiveincome (OCI)?

∆ TC / ∆ in output Marginal cost =

= ([face value - price] / face value) x (360 /days)

BDY

= (orig cost - *salvage value*) / depreciablelife

What is the formula for straight-linedepreciation?

= (pretax income − taxable income) × taxrate

How do you calculate a DTL?

= [-duration x Δ y] + [convexity x (Δ y) ²] x100

What is the combined duration/convexityformula?

= [%∆EPS / %∆Sales] / [EBIT / (EBIT-interest)]= DTL / DFL

What is a DOL formula (using EPS andsales and knowing about the firm's use of

debt)?

= [1 - P(E)] / P(E) A probability of 20%would be "4 to 1"

What are the "odds against" somethinghappening?

= [D1 / E1] / (k - g)= payout / (k - g)

What is the earnings multiplier model(justified P/E formula)?

= *2 / depreciable life in years x book value at beg ofyear*; *does not use salvage value but depreciation stopswhen residual value has been reached*

What is the formula for double-decliningbalance?

= %∆EPS / %∆Sales What is an alternative DTL formula?

= DOL x DFL What is the DTL formula?

= duration x 0.0001 x bond value What is the PVBP formula?

= HPY x (360 / days) MMY

= HPY x (365 / days)most appropriate for comparing a company's

investments in short-term securitiesBEY

= LIFO after-tax profit + [(∆ LIFO reserve) (1 − t)]

FIFO after-tax profit?

= LIFO COGS - ∆ LIFO reserve FIFO COGS

= LIFO inventory + LIFO reserve FIFO inventory

= net income - [preferred dividends] + [*convertible* prf.dividends] + [*convertible* debt int.] (1-t) -----------------------------------(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)

only income from continuing operations is considered

What is the diluted EPS formula?

= Net Profit Margin x Asset TO x Leverage Ratio---------------------------------= (NI/Sales) x (Sales/Assets) x (Assets/Equity)

What is the original three-part ROEDuPont formula?

= NI + non-cash charges + interest expense x (1 - tax rate) - capex (net capital expenditure)- working capital investment

How do you calculate FCFF

= P(E) / [1 - P(E)] A probability of 20%would be "1 to 4"

What are the "odds for" somethinghappening?

= rental income x (1 - vacancy rate)- insurance costs- property taxes- utility expense- repair / maintenance costs

*no financing cost or depreciation when calculating NOI*

How do you calculate NOI?

= revenues - ordinary expenses + other income- other expense+ gains - lossesOR= ending equity + dividends - stockholder investments - beginning equity

What is the net income formula?

= taxes payable + ∆DTL - ∆DTA What is the income tax expense equation?

=(COV stock,market) / (VAR mkt) Beta formula=

=(n + 1) x [y / 100]What is the formula for determining the

position of an observation at a givenpercentile?

=[1 - 1/k²] What is Chebyshev's inequality?

=beginning stockholder's equity +contributed capital + net income -

dividends

How do you calculate ending stockholder'sequity?

=correlation x [Std Stock / Std Market] Alternate beta formula =

=NOI- Depreciation- first mtge payment----------------------------= blah x (1 - marginal income tax rate)----------------------------= after-tax blah + depreciation - (mtge payment - (amt borrowed * mkt rate of interest))

How do you calculate after-tax cash flows?

=P(A or B) = P(A) + P(B) - P(AB) What is the addition rule of probability?

=P(AB) = P(A|B) x P(B)What is the multiplication rule of

probability?

=P(X | Y) = P(X). What is the total probability rule?

=RR x ROERR = (1 - dividend payout ratio)

What is the sustainable growth rateformula?

1 / reserve requirement Money multiplier =

1.3425, USD = forward premium, EUR = forwarddiscount; in 6 months 1 Euro will only buy 1.3425 insteadof 1.3500, so currently it is at a premium

If USD/EUR spot exchange rate is 1.3500and 6-month forward points are −75, the 6-

month forward exchange rate is:

1) *bill-and-hold arrangements* whereby revenue is recognized before the goods are shipped2) *holding the accounting period open* past year-end3) *sales-type leases* whereby the lessor recognizes a sale, and profit, at the inception of the lease,especially when the lessee does not capitalize the lease4) *early revenue recognition*: IE before fulfilling all of the terms and conditions of sale5) *recognizing revenue from swaps* and barter transactions with third parties

What are some examples of aggressiverecognition of revenue?

1) *CAPM*: Kcs = RFR +β [E(Rm) - RFR]2) *(Div / P0) + growth rate* (sometimes you will have to addgrowth to the dividend if it's going to be paid in the future)3) *Add-on yield* method (bond yield + add-on rate)

What are the three methods ofdetermining cost of equity?

1) *Character*: management's reputation and history of repayment2) *Collateral*: ability to pledge specific collateral reduces lenderrisk3) *Capacity*: ability to repay debt. requires LT view of firmsprospect.

What are the 3 C's for credit analysis?

1) *Collateral yield*: the return on the cash used as margin2) *Roll Yield*: the return from rolling forward the maturity 3) *Spot price*: changes to the price

What are the three sources of return for acommodity investment?

1) *embryonic*: slow growth, high prices, large investment needed, high risk of failure2) *growth*: rapid growth, limited competition, falling prices

3) *shakeout*: growth has slowed, intense competition, industry overcapacity, declining profitability, cost cutting, increasedfailures

4) *mature*: slow growth, consolidation, high barriers to entry, stable pricing, superior firms gain market share5) *decline*: negative growth, declining prices, consolidation

What are the five phases of industry lifecycle?

1) *Free Trade area*: all barriers to flow of goods are eliminated between members2) *Customs Union*: same as FTA & in addition creates a common trading policy with non-members3) *Common Market*: same as customs union & allows free movement of factors of production;removes all barriers to movement of labor and capital among members4) *Economic Union*: same as common market & coordination of economic policy5) *Monetary Union*: same as economic policy + adopt a common currency

What are the 5 kinds of trading blocs?

1) *identify all the important elements in the question*a) how many contracts are long/short?

b) what is the contract price?c) how many units does each contract represent?

d) what is the initial margin per contracte) what is the maintenance margin per contract

2) *start solving the problem*a) take difference between initial price and next day's price

b) multiply: (a) x (units in contract) x (number of contracts)c) next day's account value = initial margin - b

How do you solve futures contract marginproblems?

1) *incentive/pressure* (the motive to commit fraud)2) *opportunity* (weak internal controls)3) *attitude/rationalization* (mindset that fraud isjustified)

According to SAS No. 99 what are the threeconditions that are usually present when

fraud occurs?

1) *macro* - cyclical or structural; interest rates; credit availability; inflation;education leading to productivity2) *technology* - increases in productivity3) *demographic* - age distribution and size4) *governments* - taxes and regulation5) *social influences* - relate to how people work, play, spend money

What are the 5 most important externalfactors influencing industry growth?

1) *nominal*: no particular order2) *ordinal*: ordered w/respect to a specific characteristic3) *interval*: provides relative rankings; differences between the scale valuesare equal4) *ratio*: equal differences between scale values; also have true 0 as the origin

What are the four measurement scales?

1) *Planning*: IPS2) *Execution*: top-down or bottom up analysis, security selection3) *Feedback*: monitor changes with client and rebalanceportfolio, evaluate performance relative to benchmark portfolioidentified in the IPS

What are the 3 steps in the portfoliomanagement process?

1) *seed stage*: provide capital for r&d2) *early stage*a) start-up financing: complete product developmentb) first stage financing: refers to the funding of the transition to commercial production and sales of the product3) *formative stage*4) *later stage*: company is still private, company needs second and third stage financing. Third stage financing would funda major expansion of the company. *Mezzanine or bridge financing would enable a company to take the steps necessary togo public*

What are the stages of venture capitalinvesting?

1) *short can deliver the goods* and the long can accept the delivery and pay the contract price2) *cash-settlement*, delivery is not an option3) make an *offsetting trade* (*most common*)4) *exchange for physicals* (find a trader with an opposite position to your own and deliver thegoods and settle up off the floor of the exchange. ex-pit transaction)

What are the four ways to terminate afutures contract?

1) big inventory2) current ratio = big3) working capital = big4) COGS = small5) net income = big6) higher taxes7) lower cash flows

FIFO results in (assuming inflationaryperiod)

1) boosting revenue w/non-operating income and nonrecurring gains2) delaying expense recognition3) abnormal use of operating leases by lessees4) *hiding expenses by classifying them as extraordinary or nonrecurring*5) LIFO liquidations - used to boost earnings when more inventory is moved but that cannot go on forever, only so muchinventory can be sold6) abnormal gross margins and operating margin as compared to industry peers7) extending useful lives of long-term assets8) aggressive pension assumptions9) year-end surprises10) equity method investments and off-balance sheet special purpose entities11) other off-balance-sheet financing arrangements including debt guarantees

What are some indications of low qualityearnings?

1) c = S + p - (X / (1+RFR) ^ T)2) p = c - S + (X / (1+RFR) ^ T)3) S = c - p + (X / (1+RFR) ^ T)4) S + p - c = (X / (1+RFR) ^ T)

What are four synthetic portfoliosillustrating put-call parity?

1) capital (par value of common stock)2) additional paid-in capital3) retained earnings4) *accumulated other comprehensive income (OCI)*

What are the 4 owner's equity accounts?

1) current account2) capital account

3) financial account

What are the three accounts whichconstitute the BOP (balance of payments)?

1) decisions are based on cash flows, not accounting income2) Cash flows based on opportunity costs & taxes3) timing of cash flows is important4) Cash flows are analyzed on *after-tax basis*5) *financing costs are reflected in the projects required rate of return andthus should not be included in incremental cash flows.*

What are the capital budgeting principals?

1) delivery time2) quality/qty of the goods

3) manner of delivery*what is not included is delivery price*

What are the 4 major characteristics offutures contracts?

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 entities5) additional information on items such as business acquisitions or disposals, legal actions, employee benefitplans, contingencies and commitments, significant customers, sales to related parties, and segments of thefirm

What are financial statement notes(footnotes)?

1) discount rate2) open market operations (most common)3) bank reserve requirements4) persuading banks to tighten or loosen their credit policies

What are the four tools the Fed uses tocontrol interest rates?

1) divide ending value by beginning value2) Hit the LN button

How do you calculate continuouscompounding given a beginning and

ending value?

1) estimate probability of failure for each year until a payment is expected2) take each probability and subtract it from 1 and multiply them all together: this is the probability of success3) 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 outlay5) add the two numbers together: *[PV x P(success)] + [CF0 x P(failure)]*

How do calculate whether to invest in astart-up?

1) govt-owned assets abroad2) foreign owned financial assets with the

reporting countryWhat is the financial account of?

1) hypothesis test of mean value for a variable that comes from a distribution 2) when data are ranks (an ordinal measurement scale) rather than values3) hypo not involve parameters of distribution, such as testing whether avariable is normally distributed. Use run tests

What are non-parametric test situations?

1) IASB: performance elements are income and expenses*FASB: performance elements are revenues, expenses, gains, losses, and comprehensive income*2) *FASB*: an asset as a future economic benefit*IASB*: an asset is a resource from which a future economic benefit is expected 3) The word *probable* is used by the FASB to define assets and liabilities4) *FASB does not allow the values of most assets to be adjusted upward*

What are the major differences betweenGAAP and IFRS?

1) input the given rate in decimal format (IE: 10% = .10)2) 2nd + LN3) raise to power if doing for multiple periods4) subtract 1 and multiply by 100

How do you calculate continuouscompounding given a rate?

1) measures concentration of a market (usually in regards todetermining if a merger should be allowed). 2) *sum of the squares of the mkt shares of the largest firms in the mkt*.3) *does not take possible entry into mkt into account; nor does itconsider elasticity of demand*

What is the Herfindahl-Hirschman Index?

1) measures the concentration of a market (usually in regards to determiningif a merger should be allowed). 2) sum of the percentage mkt shares of the N firms in a mkt. *does notdirectly measure mkt power or elasticity of demand*. 3) *may be relatively insensitive to mergers of two firms w/large mkt shares.*

What is the N-firm concentration ratio?

1) Mutual termination2) Offsetting contract

3) Resale4) swaption

What are 4 way to terminate a swap?

1) owned by the US govt and exempt from the SEC registration2) *backed by full faith and credit of US govt*3) free from credit riskEX: Government National Mortgage Association (Ginnie Mae),TVA (Tennessee Valley Authority)

What are federally related institutions?

1) perfect competition: AR < AVC2) imperfect competition: TR < TVC

Short-run shutdown points

1) perfect competition: AR = ATC2) imperfect competition: TR = TC Breakeven points

1) Po = D1 / [Kce - g]2) Kce = (D1 / Po) + g

D1 = next year's dividendKce = required rate of returng = expected constant growth rate

What are the two dividend discount modelformulas?

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 info4) noone should be able to consistently achieve abnormal returns5) assumes cost *free availability* of all information

What is strong-form market efficiency?

1) prices fully reflect all currently available security mkt data2) price chgs are *independent* from one period to the next. 3) *TA will not work.*

What is weak form market efficiency?

1) prices fully reflect all publically available security mkt data2) prices do include past security mkt info plus non-mkt info available to thepublic3) timing of *news announcements are independent* of each other4) large # of profit maximizing participants5) *FA will not work*

What is semi-strong form marketefficiency?

1) privately owned but publicly chartered organizations2) created by US Congress3) securities issued directly in the marketplace4) expose investors to some credit risk

What are government sponsoredenterprises?

1) put return data into calculator using 2nd data func to find mean2) find difference between each period's value and each sets mean3) take period A's difference and multiply it by period B's4) sum all the values up5) *divide by n -1*

How do you calculate covariance betweentwo assets?

1) small inventory2) current ratio = small3) working capital = small4) COGS = big5) net income = small6) lower taxes7) higher cash flows

LIFO results in (assuming inflationaryperiod)

1) small sample: NA2) large sample: t-stat

Non-normal distribution with unknownvariance?

1) small sample: NA2) large sample: z-stat

Non-normal distribution with knownvariance?

1) small sample: t-stat2) large sample: t-stat or z-stat

Normal distribution with unknownvariance?

1) small sample: z-stat2) large sample: z-stat

Normal distribution with known variance?

1) the board of directors protects shareholders interests2) the firm acts lawfully and ethically in dealings w/shareholders3) the rights of shareholders are protected and shareholders have a voice in governance4) the board acts independently from management5) proper procedures and controls cover management's day-to-day operations.6) the firm's financial, operating and governance activities are reporting to shareholders in afair, accurate and timely manner.

Good corporate governance practices seekto ensure that?

1) Z-Spread is the credit spread that adjusts for the curvature of the spot rate yld curve.2) Z-Spread is the constant spread which must be added to each rate on the Treasury spot yieldcurve in order to make the present value of the risky bond's cash flows equal to its market price.3) The steeper the benchmark spot rate curve, the greater the difference between the two spreadmeasures.4) The earlier bond principal is paid, the greater the difference between the two spread measures.

What are four characteristics of the zero-volatility spread measure?

2 x [[1+HPY] ^ (182.5 / t)]How do you calculate the BEY from the

HPY?

365 / inventory turnover What is days of inventory on hand?

365 / payables turnover What is number of days of payables?

365 / receivables turnover What is days sales outstanding (DSO)?

A forward rate agreement can be viewed as a forward contract toborrow/lend money at a certain rate at some future date. FRAs:1) settle in cash2) no actual loan is made3) *creditworthiness of the parties involved need not be considered.*

What is a forward rate agreement (FRA)?

A line created in a graph of all possible combinations of risky and risk-free assets. Also known as the "reward-to-variability ratio"; as you increase the weight of the risky asset you get more risk but also a higher return

What is the capital allocation line (CAL)?

A line used in the capital asset pricing model to illustrate the rates of return for efficient portfolios depending on the risk-freerate of return and the level of risk (standard deviation) for a particular portfolio; represents all possible combinations of themarket portfolio with the risk-free asset; *derived by drawing a tangent line from the intercept point on the efficient frontier tothe point where the expected return equals the risk-free rate of return.*; considered to be superior to the efficient frontier sinceit takes into account the inclusion of a risk-free asset in the portfolio. The capital asset pricing model (CAPM) demonstrates

that the market portfolio is essentially the efficient frontier.

What is the capital markets line (CML)?

a test of whether the average difference between monthly returns issignificantly different from zero, based on the standard error of thedifferences in monthly terms

What is a paired comparisons test?

amt of capital at which a component's cost of cap chgs= -----------------------------------------------------weight of component in capital structure

What is the break point formula?

an investment in a project today thatcreates the opportunity to invest in other

projects in the futureWhat is project sequencing?

annual sales / average receivables What is receivables turnover?

arithmetic average *of the returns* of each component in the index;disadvantage: period rebalancing (similar to price-weighted);weights placed on returns of the securities of smaller cap firms aregreater than their proportions of the overall market value of theindex stocks

What is the equal-weighted index formula?

as either an *operating expense OR aninvesting activity*

Under IFRS where can interest expensebe reported?

assets = liabilities + contributed capital

+ beginning retained earnings + revenue - expenses - dividends

What is the super duper expandedaccounting equation?

beginning bond value x *market rate ofinterest*

How is interest expense calculated for adiscount or premium bond?

C + I + G + (X - M) GDP equation =

calculated by subtracting the minimum desired return from the expected return of the portfolio and dividing the result by thestandard deviation of portfolio returns. The optimal portfolio will be the one that minimizes the probability that the

portfolio's return will fall below a threshold level.

What is Roy's Safety First Criteria?

calculated by subtracting the risk-free rate - such as that of the 10-year U.S.Treasury bond - from the rate of return for a portfolio and dividing the result

by the standard deviation of the portfolio returns

What is the Sharpe ratio?

capital and laborWhat are the two factors of production

under the Heckscher/Ohlin model?

cash + marketable securities / currentliabilities

What is the cash ratio?

cash + marketable securities + receivables/ current liabilities

What is the quick ratio?

CFO: higherCFI: lower; *capitalized expenditure is

reported as an outflow*

How is CFO/CFI affected whenexpenditures are capitalized?

CFO: lower CFI: higher; the expense flowed through the incomestatement & CFO statement. CFI is higher than normalbecause there is *no outflow for investing activities*

How is CFO/CFI affected whenexpenditures are expensed?

changes which result from *foreign currency translation, minimumpension liability adjustments, or unrealized gains and losses oninvestments (securities held-for-trading)*; flows to accumulatedother comprehensive income on balance sheet

What is "other comprehensive income"?

CNF1) complete

2) neutral (absence of bias)3) free from error

What are the three characteristics offaithful representation?

COGS / average inventory What is inventory turnover?

computed by adding up the collective marketcapitalizations of its members and dividing it by thenumber of securities in the index

What is the market capitalization-weightedindex formula?

correlation coefficientWhat does r on your calculator when using

the 2nd Data functions?

coupon rate < current yield < yield tomaturity

Discount bond

coupon rate = current yield = yield tomaturity

Par bond

coupon rate > current yield > yield tomaturity

Premium bond

create DTA if taxes paid > income tax expense

create DTL if taxes paid < income tax expense

CTVU1) comparability2) verifiability 3) timeliness

4) understandability

What are the 4 qualitativecharacteristics that enhance relevanceand faithful representation under IFRS?

currency in the denominator What is the base currency?

currency in the numerator What is the price currency?

D/E: % debt / (1 - %debt)t : marginal tax rate

What is asset beta?

DEHP (Department of Environment and Heritage Protection)1) Declaration date2) ex-dividend date (occurs TWO business days before the holder-of-recorddate)3) holder-of-record date4) payment date

What is the proper dividend sequence?

differences in labor productivity due to differences intechnology

What is the source of differences inproduction costs in the Ricardian model?

direct quote (foreign currency indenominator)

The foreign currency is the base currencyfor a?

discount all dividends to present as well as a "perpetuity" value; don't forget to discount the "perpetuity" value to the presentas well. add dividends and perp value together; *appropriate for rapidly growing companies*

What is the multi-period DDM?

does not consider particular population parameter or have fewassumptions about population that is sampled. Used whenconcerned about quantities other than the parameters of adistribution or when the assumptions of the parametric tests can'tbe supported.

What are non-parametric tests

DSO + DOH - DPO What is the cash conversion cycle (CCC)?

ending inventory = beginning inventory +purchases - COGS

How do you calculate ending inventory?

Ep > 1; demand is elasticEp = 1; demand is unitary elastic

Ep < 1; demand is inelastic

What are the three categories of priceelasticity?

Europe Interbank Offer Rate; a daily reference rate based on theaveraged interest rates at which Eurozone banks offer to lendunsecured funds to other banks in the euro wholesale moneymarket (or interbank market)

What is Euribor?

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 business2) Provisions for environmental remediation, impairments, write-offs, write-downs, restructuring.3) Integration expense for recently acquired business

What are unusual or infrequent items?

EX: how much reinvestment income would so-and-so need to earn over X years to achieve a compound rateof return of Y?

PV * (rate ^ periods)- principal repayment- [bond coupons x periods]------------------------------------= reinvestment income

How do you calculate reinvestmentincome?

fixed operating costs ---------------------------

Price - variable cost per unit

What is Qbe (operating breakevenquantity)?

fixed operating costs + fixed financing costs------------------------------------------------------Price - variable cost per unit

What is Qbe (break even quantity)?

forward rate = spot rate x (1+domestic rate/ 1+foreign rate)

What is the interest rate parity formula?

global minimum-variance portfolioThe portfolio on the efficient frontier that

has the least risk is the ...

graph that show's a project's NPV for different discount rates; y-axis=NPVx-axis=cost of capital/discount rate

*when profile touches x-axis NPV = 0*

What are NPV profiles?

growth in technology + growth in labor +growth in capital

Growth in potential GDP =

if carrying value > *undiscounted CF*from asset's use and disposal

How are impairments recognized underGAAP?

if given 3f3, this means you want to know the 3 year fwd rate, 3 years from now. what you need tocalculate this is:1) 3-year spot rate2) 6-year spot rate3) formula:

= [ (1 + z6)⁶ / (1 + z3)³ ] - 1

How do you calculate a forward rate fromspot rates?

If null is true & fail to reject = Correct!if null is true and reject = Type 1 error! significance level, α

--------------------------------------------------------If null is false & fail to reject = Type 2 error!

if null is false and reject = Correct! (1- P)

Type I & II Errors

in the futures market no funds are loanedto the buyer of the futures and

consequently there are no interest charges

How does the concept of margin in thefutures market differ from the concept of

margin in the stock market?

indirect quote (home currency indenominator)

The home currency is the base currency fora?

investor's highest utility curve is tangentto the efficient frontier

According to Markowitz, an investor'soptimal portfolio is determined where the?

it does not assume that individual market participants correctlyestimate asset prices, but does assume that their *estimates areunbiased*. That is, some agents will over-estimate and some willunder-estimate, but they will be correct, on average

What does market efficiency assume?

Kce = RFR + β [E (Rmkt) - (RFR + CRP)]What is the CAPM with country risk

premium (CRP)?

Kcs = RFR +β [E(Rm) - RFR] What is the CAPM formula?

long has right to borrow at below marketrates and short has obligation to lend. *The

long will receive a payment.*

Considering forward rates, if floating rate> fixed rate

mean < median < mode negative skewness

measure of its systemic / market riskD/E: % debt / (1 - %debt)

t : marginal tax rate

What is project beta?

Min: C ≥ MAX[0, S - [X / (1+RFR)^T-t]]Max: S

What are the maximum and minimumvalues for a American call option?

Min: c ≥ MAX[0, S - [X / (1+RFR)^T-t]]Max: S

What are the maximum and minimumvalues for a European call option?

Min: p ≥ MAX[0, [X / (1+RFR)^T-t] - S]Max: X / (1+RFR)^T-t

What are the maximum and minimumvalues of a European put option?

Min: P ≥ MAX[0, X-S]Max: X

What are the maximum and minimumvalues of a American put option?

MMY x [t / 360] How do you calculate HPY from MMY?

mode < median < mean positive skewness

Moment 2 = variance (squared)Moment 3 = skew (cubed)

Moment 4 = kurtosis (4ths)What are the 3 moments?

MV = PY (money supply x velocity = pricex real output)

Equation of exchange =

net income - preferred dividends----------------------------------------------weighted avg of common shares out

What is the basic EPS formula?

net present value of an investment equals the present value of after-tax 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 is the discounted after-tax cash flowmethod?

Net Sales- COGS----------------------------= Gross Profit- Operating expenses----------------------------= Operating Profit (EBIT)- Interest----------------------------= Earnings before taxes (EBT)- Taxes----------------------------= Earnings after taxes (EAT)+/- Below the line items adjusted for tax----------------------------= Net Income-Preferred Dividends----------------------------= Income available to common

How do you calculate income available tocommon?

new shares = [(avg mkt price − exerciseprice) / avg mkt price] x [# of options out]

What is the treasury stock method?

no. why? bc all three face downward sloping demand curves; qtysupplied is determined by the intersection of MC and MR; pricecharged is then determined by the demand curve. only perfectcompetition has a well-defined supply curve.

Is there a well-defined supply functionunder monopolistic competition,

oligopoly and monopoly?

nominal interest rate = real interest rate +*expected* inflation rate

Fisher effect =

Operating cash flow+ Investing cash flow+ Financing cash flow----------------------------= Chg in cash balance+ Beg cash balance----------------------------= Ending cash balance

How do you calculate ending cashbalances?

outcome of long-term contract *CAN BE* reliably measured; same for IFRS and GAAP; *more aggressive*; income andbalance sheet will differ from completed contract - cash flows are not different

net income = [(total cost incurred / total cost) x total revenue] - total cost incurred

What is the percentage of completionmethod?

overvalued (RR > ER)If a portfolio plots below the SML, the

portfolio is ...

P0 x (1 - initial / 1 - maintenance)How do you calculate the margin call

price?

PCM1) predictive value

2) confirmatory value3) materiality

What are the three characteristics ofrelevance?

point estimate + reliability factor +standard error

What is the general confidence intervalformula?

positively sloped straight line showing relationship between expected returnand beta (systemic risk)

What is the security market line (SML)?

purchases / average payablespurchases = ending inventory - beginning

inventory + COGSWhat is payables turnover?

puts: go downcalls: go up

If RFR goes up

puts: go upcalls: go down

If RFR goes down

QOB (Queen of Bobs)1) *quote-driven*: investors trade w/dealers2) *order-driven*: matches buyers and sellers based on price andtime precedence 3) *brokered markets*: investors use brokers

What are the 3 types of market structures?

reflects net change in national ownership of assets. A surplusmeans money is flowing into the country; deficit means money isflowing out the country, but it also suggests the nation isincreasing its claims on foreign assets.

What is the capital account?

rely on assumptions regarding distributionof population and are specific to

population parameters.What are parametric tests?

revenue / average net fixed assets What is fixed asset turnover?

revenue / average total assets What is total asset turnover?

revenue / average working capital What is working capital turnover?

RF1) relevance

2) faithful representation

What are the two qualitativecharacteristics that make financial

information useful?

risk associated with *operating income* and is result of*uncertainty about a firms revenues and expenditures* necessary toproduce those revenues; main factors are *demand variability, salesprice variability, input price variability, ability to adjust outputprices, and operating leverage*

What is business risk?

s₁² / s₂²; always put the larger variance in the numeratorconcerned with the *equality of the variances of twopopulations*

What is the F-statistic?

same for both US GAAP and IFRS; must be physically and operationallydistinct from the rest of the firm; management has decided to dispose of buteither hasn't done so or did dispose of in the current period after the operationhad generated income or losses; reported separately in the income statement,net of tax, after income from continuing operations; should be excluded by theanalyst when forecasting future earnings

Where are discontinued operationsreported?

sample mean - population mean What is sampling error?

short will receive cash payment from thelong (right to lend at higher than market

rates)

Considering forward rates, if floating rate< fixed rate

since the interest savings would come at the end of the loan period, the cash payment at settlement of the forward is thepresent value of the interest savings

Why do we discount the future payoutfrom a forward rate agreement (FRA)?

standard deviation of x / mean of x

What is the formula for the coefficient ofvariation?

stock is overpriced; short it If the RR > ER

stock is underpriced; buy it If the RR < ER

stock that has been reacquired by the issuing firm but notyet retired; *reduces stockholder's equity*; has no votingrights; does not receive dividends

What are treasury shares (stock)?

sum of the balance of trade (X - M); both governmentand private payments are included in the calculation;goods and services are generally consumed in the currentperiod.

What is the current account?

TCC1) transparency

2) comprehensiveness3) consistency

What are the three aspects of a coherentfinancial reporting framework?

the fixed pays, floating receives If the net-fixed payment is positive ...

the floating pays, fixed receives If the net-fixed payment is negative ...

The situation where a firm has more positive NPV projectsthan its available budget can fund. It must choose acombination of those projects that maximizes shareholderwealth.

What is capital rationing?

the WACC at different levels of capital investment. It is usually upward sloping and is a functionof a firm's capital structure and its cost of capital at different levels of total capital investment.

What is the marginal cost of capitalschedule?

think budget constraints and indifference curves from economics; thiscombines the CML (risk-free rate and efficient frontier) with an investor'sindifference curve map; it separates out the decision to invest from what toinvest in. The investment selection process is simplified from stock picking toefficient portfolio construction through diversification.

What is the separation theorem?

think sensitivity; when you get more cash now, the bond has less sensitivity to interest rate moves; when youhave to wait longer to get the final payout, the bond has more sensitivity How do think about duration

TR < TCP < AC

Long-run shutdown points

uncertainty about operating *EARNINGS*caused by *FIXED* operating costs.

What is operating risk?

undervalued (RR < ER)If a portfolio plots above the SML, the

portfolio is ...

US GAAP: *unusual AND infrequent items*; reported separately netof tax and appears on the income statement below discontinuedoperationsIFRS: *does not allow extraordinary treatment in the incomestatement

What are extraordinary items?

USD time-deposits outside of the US. Banks borrow dollars fromother banks by issuing Eurodollar time deposits (*certificates ofdeposit*), which are essentially unsecured loans. The rate of theloans is LIBOR (London Interbank Offer Rate)

What is a Eurodollar deposit?

used for hypothesis tests concerning thevariance of a normally distributed

populationWhat is a chi-squared test?

uses a discounted cash flow model to estimate the present value of the futureincome produced by the property; this method uses NOI (net operating income)divided by estimated market required rate of return (or cap rate). Ignoreschanges to NOI and does not take in to account an investors income taximplications

What is the income method?

uses both price return and interim cash flows to calculatereturn; *always greater than price return index* What is a total return index?

uses present values of the projects estimated cash flows. Number of years it takes a project to recover its initial investment inPV terms and must be greater than the payback period without discounting. This method ignores terminal values.

What is the discounted payback period?

value is determined by the *replacementcost* of improvements plus an estimate

for the value of the landWhat is the cost method?

value is determined by the price of a*similar property* or properties from

recent transactionsWhat is the sales comparison method?

value of stock *TODAY* is PV of any dividends during the year plus thePV 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 one-year holding period DDM?

when outcome of a long-term contract *CANNOT* be reliably measured*IFRS*: pairs revenue and expense together, costs are expensed when incurred and profit is recognized only at completion.

*GAAP*: revenue, expense and profit are recognized ONLY when the contract is completed

What is the "under completed contractmethod"?

whether a lease is an operating or a finance lease, both GAAP andIFRS require disclosure of the minimum lease payments *for eachof the next five years and the sum of minimum lease payments morethan five years in the future*

How are lease payments accounted for?

with the t-test for testing the hypothesis that the *means of two normally distributed populations are equal*,when the variances of the populations are unknown but assumed to be equal When is a pooled variance used?

X - M = private savings + governmentsavings - investment

X - M = (T - G) + (S - I)

What is the equation representing therelationship between trade deficit, saving

and domestic investment?

you are borrowing funds and owning morethan 100% of the market portfolio

What does it mean to move rightward ofthe mkt portfolio?

you are lending funds or *buying the risk-free asset* (IE lending to someone else for

a return)

What does it mean to move leftward of themkt portfolio?

z-spread < nominal spreadWhen the spot yield curve is downward

sloping ...

z-spread > nominal spreadWhen the spot yield curve is upward

sloping ...