R-FinalC2

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premium over straight value

(Market price of convertible bond / straight value) - 1

Give two formula to find the Market Capitalization rate

(NOI / MV) or (r - g)

Formula for P/B?

(ROE - g) ________ (r- g)

Name three credit risks

- credit spread risk - default risk - downgrade risk

What should be included in Client-Directed Brokerage Arrangement?

- it will solely benefit the client - IM's seeking best execution is still relevant - restate the IM's continuing responsibility for seeking to obtain best execution - list the eligible brokers - specify approx target % or dollar amounts of transactions to be directed - state procedures for monitoring the arrangements

Profitability Index?

1 + (NPV)/(Initial investment) where it is greater than 1, invest, otherwise do not invest

discount for lack of marketability (DLOM)

1 - (1- DLOM) x ( 1-DLOC) -> total discount

Beta for the market as a whole must equal to..

1!!

Tangible P/E

1/r

Franchise Factor?

1/r - 1/ROE

CAPM for emerging equity?

10 year US Treasury + (inflation diff with emerging country vs US) + Global Risk Premium x Global Beta

what is the cash collections from customer if..... Revenue: 137 Beg A/R : 11 End A/R : 16 Securitized A/R at year end: 2

130!! 137- (5+2)

variance of return on a two asset portofolio and three-asset portfolio?

2 assets, portfolio var= w1^2 x stdev(1)^2 +w2^2 x stdev(2)^2 + 2 x w1 x w2 x correlation x stdev(1) x stdev(2) 3assets = w1^2 x stdev(1)^2 +w2^2 x stdev(2)^2 + w3^2 x stdev(3)^2 + 2 x w1 x w2 x correlation(1,2) x stdev(1) x stdev(2) + 2 x w1 x w3 x correlation(1,3) x stdev(1) x stdev(3) + 2 x w2 x w3 x correlation(2,3) x stdev(2) x stdev(3)

if LIBOR term is 2.62%(annualized) for 180 days, what is it for 135 days?

2.62% x 135/360

what is the accrual-basis earnings included in total revenue if..... Beg A/R : 12 Beg Unearned Revenue : 31 End A/R : 15 End Unearned Revenue : 27

7!! increase in A/R + decrease in U/R

what is the recommended % of independent board directors appearance ?

75%

Adjusted R^2 formula?

=1-(n-1)/(n-k-1)*(1-R^2) adjusted R-square is always lower than the regular R-square

Total Capital?

=Total Assets

Unlocking HIdden Value?

A target company substantially underperforming due to a weak management so it is deeply discounted value e.g. break up value (can be achieved if a company's assets are divided and sold separately.)

How much needs to be borrowed given risk free rate, expected return on the market portfolio of risky assets to ahieve A% of return?

A%= (w) x (Expected Retrun on Risky Assets) + (1-w) x RfR. Solve for amount (1-w), if it is negative, then investors borrow it

ABS vs corporate bonds on cash flow?

ABS has greater certainly about the cash flow than cpor bonds as it is of the absence of operational risk

Aggregate accruals?

Accrual basis earnings - cash earnings

How Assets recorded under Acquisition Method?

Add each Acquiree FAIR VALUE Amounts + Goodwill

Amortization of long-term bond discount is added back or subtracted to calculate FCFF?

Added back

Financial Leverage?

Asset/Equity

Reversal for impairment losses for equity method allowed in GAAP or IFRS?

BOTH GAAP and IFRS prohibits reversal of impairment losses

Single Stage Residual Income Model?

BV(t-1) + [(ROE - r) x BV(t-1)]/(r-g)

Investment in Associate, show steps to find end balance

Beginning Balance (or Cost) + N/I x share% - Div paid x share% - Amortization of excess amount paid for tangible such as PPE x share% !!!!!!!Land is excluded here!!!!!!!!!

Formula for Systematic Risk?

Beta^2 x σmkt^2

Are borrowing costs (interest) expensed under U.S. GAAP or IFRS?

Borrowing costs (interest) is expensed in the year incurred by both IFRS and U.S. GAAP

if there is no comparable public equity firms, which model is recommended to estimate the discount rate? and under its method, how do you calculate it? give formula

Build-up method method risk free rate + equity risk premium + small stock premium + industry risk premium + company-specific risk adjustment

fiduciary call ..replicated by?

Buy a call and a risk-free bond at the same time ->similar payoff as protective put (long an European put and long underlying)

Buyout vs Venture Capital - which needs more due diligence?

Buyout needs extensive due diligence, while Venture capital is limited due to short history

Solvency Ratio?

CA/CL or Total Assets / Total Liabilities anything more than 20% indicate a good condition

Managealism theory?

CEO tends to prefer larger powers and bonus and incomes by increasing the size of firms with acquisitions etc.

Formula for Economic Income?

CF - (V0 - V1) =CF - (Economic Depreciation) :where V0 and V1 only focuses on Operating Cash flow not including initial outlay but !!!!!!!!!!!!!!!!!INCLUDES terminal year non operating cash!!!!!!!!!!!!! Use WACC to discount to find out V0. e.g. CF1/WACC...etc

What is the expense called for Operating Lease and under which cash flow?

CF from Operation 100% and it is called Rent Expense 100%

Inventory write down affects on COGS , Assets, Inventory and inventory method?

COGS to be higher, assets to be lower, inventory to be lower Among LIFO, FIFO and Weighted Avg, LIFO is less influenced by inventory write down

what is cash collections from customer if.. Revenue=10 Δ in A/R increased= 1 Δ in A/P increased= 3 Δ in Unearned Revenue increased= 2

Cash collections from customer = 10 - 1 + 2 = Sales - Δ in A/R increased + Δ in Unearned Revenue increase

strong track record of solid strategic planning and management - which 4Cs of credit analysis is it?

Character

What is the expense called for Capital Lease and under which cash flow? what about Income Statement?

Combination of CF Operations and CF Financing under CF Operations = Beg Lease Value x Discount Rate called Interest Expense under CF Financing = Payment - Interest Expense called payment on principal In income statement, there are two parts 1, interest expense is Beg Lease Value x Discount Rate 2, depreciation expense depending on depreciation method

what is non-compete clauses?

Company founders must sign such clauses to prevent from competing against the firm

What method to use for Business Combination?

Consolidation method

Conventional vs non conventional cash-flow?

Conv - after initial outlay positive cash flow UnConv. - after initial, negative cash flow may arise

convenient yield decrease or increase the future price(value)?

Convenient yeilds decrease the value of Futures contract

Share repurchase Cash dividends paid Proceeds from new shares issued Convertible bond issue which one has the largest impact on FCFE and FCFF

Convertible bond issue has the largest impact on FCFE as it impacts the debt outstanding dividends, share purchase, changes in outstanding common stock# do NOT have impact on FCFE and FEFF

Country Spread Model vs Country Risk rating Model

Country Spread Model - first evaluate developing country premium then adds country risk premium Country Risk rating Model - use developed country premium as an input

Relative to underlying, credit derivatives allow greater or lower liquidity, customized positions and confidentiality? state each

Credit Derivatives offer all greater liquidity customized positions and confidentiality..wow wow wow wow wow amazing.

Current Method vs Temporal Method - How are the translation gains and losses reported under each method?

Current Method - Cumulative Translation Adjustment (OCI) (exposure is net asset) Temporal Method - G/L in Income Statement (GAAP calls this re-measurement) (exposure is net monetary asset/liability that is adjusted for non-monetary assets and liabilities)

Dividends - what rate is used under current rate method and temporal method?

Current-Method - Historical Temporal Method - Historical

Basis Trade or Curve Trade for a company with financial difficulties?

Curve

Discounted Cash Flow method and Relative Value/Market Approach, which one is more common in evaluating Buyout vs Venture Capital

DCF and Relative/market approach both appropriate for Buyout ONLY

discount for lack of control? (DLOC)

DLOC = 1 - (1/ [1 + control premium] )

Discount for Lack of Control (DLOC)?

DLOC = 1 - [1/(1+Control Premium)]

Designated at Fair Value? what is it and among which HFT, HTM, AFS similar?

Designate investments at fair value that might have been classified as AFS or HTM. Treatment is similar to Held for Trading

what test to be conducted for unit root?

Dickey Fuller test

Among Asset-based approach, excess earnings approach and discounted free cash flow approach - which one is more commonly used for private equity company valuation?

Discounted free cash flow approach is more common Asset-Based approach rarely takes place as it is typically used for liquidating firms.

What are the principals of the New Prudent Man Rule?

Diversification is fundamental to risk minimization and is therefore ordinarily required of trustees. Risk and return are so directly related that trustees have a duty to analyze and make conscious decisions concerning the levels of risk appropriate to the purposes, distribution requirements, and other circumstances of the trusts they administer. Trustees have a duty to avoid fees, transaction costs, and other expenses that are not justified by the objectives of the investment program. The fiduciary duty of impartiality requires a balancing of the elements of return between production of income and the protection of purchasing power. This confirms that a strategy which endeavors to generate current income while preserving principal is likely to result in a reduction of real income to beneficiaries due to inflation. For that reason (as well as tax-effects), it is often prudent to invest both for income (i.e., through dividends) and for capital appreciation, even if it means income alone is inadequate to meet a beneficiary's cash-flow needs. Trustees may have duty, as well as the authority, to delegate as prudent investors would. This delegation is often in the form of investing in mutual funds.

Formula to find amounts to borrow at risk-free rate

E(Rp) = w x E(Rm) + (1-w) x Rf where (-) sign indicates a borrow

Operating Income as E..what?

EBIT!

In calculating economic pension expense with a method (non using my favorite method), what items need to be NON-considered? state each in PBO and Pension plan assets

Economic Pension Expense = changes in (PBO - Pension Plan assets) items to be excluded in calculating the above PBO) excludes Any Contributions, Benefit Paid PLA) excludes Any contributions and Benefit Paid

Ibbotson-Chen's earning model

Equity Risk Premium = [(1 + LTforecast of inflation) x (1 + growth in real earning) x (1 + gorwth in market P/E) -1] + Dividend yield - Rfr

How is the Exit Value calculated in Private Equity?

Exit Value = Investment Cost + Earnings growth + increase in price multiple + reduction in debt

relationship among expected return on the tangency portolio, risk free rate and expeted risk premium?

Expected tangency portofolio=risk free rate + expected risk premium

What test is conducted to determine if the regression omdel as a whole is significant?

F-test

Converting FCFE from FCFF?

FCFE = FCFF - Interest ( 1-t ) + Net Borrowing

FCFF given CFO

FCFF = CFO + Int(1-t) -FCInv

FCFF given EBIT

FCFF = EBIT(1-t) + NCC -FCInv - WCInv

FCFF given EBITDA

FCFF = EBITDA(1-t) + NCC(tax) -FCInv - WCInv

FCFF given N/I

FCFF = N/I + NCC(e.g Dep) + Int(1-t) -FCInv - WCInv

What is the expense related to stock options? Show calculation

FV of the shares on the grant date DIVIDED BY vesting period years

What are assets and liabilities of the acquired firm recorded at?

Fair Value at the date of acquisition Acquiring firm reports assets and liabilities with a mixture of bases for valuation: old assets continue to be reported at historical cost whice acquired assets are carried at their fair value

What are the feedback steps in PM construction?

Feedback step for portfolio evaluation and monitoring and rebalancing

Financial Leverage Ratio?

Financial Leverage Ratio also known as Equity Multiplier = Total Assets / Total Stockholders' Equity

Mean takeover premium to find out fair acquisition price based on comparable company approached

First, Find P/E, P/S, P/B etc and average them Next, Average P/E x Company's Earning/Share Average P/S x Company's Sales/share etc Then, average those to find the Value Next, Use the above Value x (Mean acquisition premium) to find Value

Curve trade steepner and flattener?

Flattener is buying short term protection and selling long-term protection as you see a short term risk. Sharper is selling the short end and buying the long-term protection as you see a long-term risk

conditional prepayment rate (CPR)?

For example, if the CPR is 8%, we would expect that 8% of the remaining principal will be prepaid each year.

Foreign currency premium?

Foreign currency premium = (new exchange rate - current rate)/(current rate) - (domestic RfR - foreign RfR)

which one is more prescriptive and specify more to determine whether operating or capital lease

GAAP is more specific

GAAP or IFRS which one can separate by QSPE?

GAAP only but eliminated now IFRS must consolidate

Revaluation allowed?

GAAP prohibits upward revaluation IFRS permits revaluation of intangible assets

How are inventories measured in GAAP and IFRS?

GAAP: Inventories are measured at Market or Lower of costs IFRS: Inventories are measured at the lower of the cost and net realisable value

Formula for Franchise P/E?

GG x FF = PVGO/E =g/(r-g) x (1/r - 1/ROE)

guideline public company method (GPCM)?

GPCM establishes a value estimate based on the observed multiples from trading activity in the shares of public companies viewed as reasonably comparable to the subject private company. in GPCM, pricing multiple groups similar to the private company need to be identified then adjust them to reflect any differences in risk and growth expectations for the company including control premium etc.

Goodwill for Equity Method?

Goodwill= Purchase price - BV of Net Assets x share% - PPE and Lands and more? x share%

Price movement relative strength vs. S&P500 is Value or Growth?

Growth and Momentum

Effect and Solution amongst Hetroskedasticitym serial correlation, Multicollinearity

Hetroskedasticity, incorrect standard erros, use robust standard errors to remedy Serial correlation, incorrect standard errors, use robust standard errors Multicollinearity, High R^2 and low s-stats, remove one or more independent variables often no solution in theory

where does funded status reported under for IFRS?

IFRS the net pension asset or liability reported on the balance sheet represents the funded status adjusted for unrecognized items

Joint Ventures what method to use?

IFRS - Proportionate Consolidation is preferred (line by line basis) GAAP - Equity method

What are the types of exit in private equity?

IPO Secondary Market Sale Management Buyout - firm is sold to mgmt Liquidation

what cash-flow adjustment needed in comparing pension expense?

If contributions EXCEEDS economic pension expense then increase CFO and decrease CFF (the difference between economic pension expense vs contributions) If pension expense EXCEEDS contributions then decrease CFO increase CFF

what is busted convertaible?

If the stock price is low, so the straight value is considerably higher than the conversion value. The bond will trade much like a straight bond. So the premium over the straight value is very small

cash flow from operating from impairment loss?

Impairment will not affect cash flow so no change

backwardation vs normal backwardation?

In backwardation, the future price vs CURRENT spot price and see that future prices are lower In normal backwardation, we compare the future price with the EXPECTED spot price.

How is Clawback calculated?

In the deal-by-deal method, Losses to be clawed back is Losses x Carried Interest %

Full goodwill vs partial goodwill Income Statement - what is higher under which method?

Income Statement is same under either method

Dividends will increase or decrease value of call options and put options

Increase the value of PUT Decrease the value of CALL

what are the warning signs of financial reporting in Expense section?

Increases in the core operating margin (Sales - COGS - SG&A)/Sales accompanied by spikes in negative special items *indicating opportunistic classification of recurring expenses as nonrecurring

Interest expense in Pretax Income?

Interests are already deducted

Investment income in Equity method before or after EBIT?

Investment in associates is equity method it is below EBIT in "one-line". The "one-line" is revenues and expenses netted out. EBIT is operating income and investment in associates is not operating income, that is why it is below it

what are the risk measures for Jensen's alpha and Sharpe ratio?

Jensen's alpha = systematic risk only (CAPM) Shape ratio= standard deviation so TOTAL RISK!!

What are the three types of joint ventures under IFRS? State each

Jointly controlled operations Jointly controlled assets Jointly controlled entities (establishing a separate entity)

Cumulative tax savings with LIFO vs FIFO?

LIFO reserve for the year-1 x tax) + the change in LIFO reserve from year-1 to year now x tax

LPs vs GPs

LP is limited while GP is unlimited

Protective Put replicated by?

Long the underlying asset and long put options ->similar to holding a Long Call. Protective Put is a Bullish position

Covered Call replicated by?

Long the underlying asset and short call options. Similar to holding a Short Put. Covered Call is a Bullish

Clawback?

Loss x Carried Interest rate will be paid back... even if fund is profitable in early years, GP needs to pay back compensation received if underperforms in later years usually at termination but can be done annually that is called true-up clawback provision

can IM use Brokerage from another Client account to pay for a product or service purchaased under the Client Directed Brokerage Arrangement?

MUST NOT

(Softdollar) IM can allocate a client's brokerage based on the amount of client referrals?

MUST NOT!! NEVER EVER

What is the Gross Income Multiplier Technique? and State its limitations

MV = gross income x gross income multiplier limitations: discontinuous pricing lack of information gross rent versus NOI distorted selling prices unique or non-income producing properties

Marker conversion price for CB?

Market Price of Bonds / conversion ratio

Market Capitalization?

Market capitalization = (number of outstanding shares) x (current stock price)

what is the characteristic of the standard deviation in Global minimum variance portfolio?

Minimum variance frontier has the smallest standard deviation

what model is appropriate in valuting mortgage back securities?

Montel Carlo model is appropriate as it considers deceisions to call depends on interest path, while binominal model does not

Moving average model, what is its weakness and and how to find whether model fits a time series?

Moving Average model is lagged behind. You can examine autocorrelations. First correlations is significantly different from 0. And the next autocorrelations are equal to 0

What is included in income statement typically in Equity Method?

N/I of investee x share% , amortization, and downstream, upstream transactions if applicable ***********Dividends not included***

Formula for Du Point with EBT

NI/EBT x EBT/EBIT x EBIT/Sales x Sales/Asses x Asset/Equity

what is the effect on expected return (DB) when discount rate increased?

No effect!

Can recovery of value subsequent to a writedown be recognized under U.S. GAAP?

No! But a recovery of value subsequent to a writedown can be recognized under IFRS.

Gross profit margin considers SG & A?

No, Gross Profit Margin is simply (Revenue - COGS) _________________ Revenue

ABS structure requires waterfall service to the originator?

No, and collateral is separate and distinct entity, originator(seller) is not responsible

RMBS for non US loans are similar to?

Nonagency loans

which yield difference between two spreads should it indicate Option costs?

OAS and Z-spread

OAS is spread relative to what?

OAS can be computed based on any benchmark interest rates

critical assumption in estimating effective duration and convexity with Monte Carlo?

OAS does not change

OAS?

OAS is calculated using a binominal or Monte Carlo simulation mode and it measures the average spread over the Treasury spot rate curve NOT Treasury yield curve. OAS compensates for a combination of credit risk and liquidity risk

cap/floor on rates are...like...

Options! Seller of Cap is agreed to pay if LIBOR exceeds the Cap Rate. Seller of Floor is agreed to pay if LIBOR is less than the Floor Rate.

when the PV of expected future residual income is negative, the justified P/B will be...?

P/B will be less than 1 !!!!

conversion ratio for CB?

PAR / conversion price

A warning sign a company deferring expenses is when sales revenue growing at a slower rate than what?

PP&E (indicating expenses are being inappropriately capitalized)

J-curve in which investment usually seen?

Private Equity investment but PE is very high risk

Formula for P/S?

Profit Margin x ( 1- retention rate ) x (1+g) ____________________________________________ (r - g)

How to calculate Goodwill in Equity method?

Purchase Price - (% x BV of Net Assets) - (% x (MV - BV of PPE , Land etc )

ROIC, NOPLAT, NOPAT

ROIC (NOPLAT/Inv Capital) NOPLAT which is (EBITA -tax) NOPAT equals EBI basically NOPLAT=NOPAT but NOPLAT is EBITA less tax NOPAT is EBIT less tax

what are the consequences in nominal basis for emerging valuation for ROIC and Net PPE/Revenue

ROIC (NOPLAT/Inv Capital) is overstated in nominal basis Net PPE/Rev is understated in nominal basis

adjust analysts forecast based on the accuracy of prior forecast how?

R^2 / Alpha

which equity valuation model recognizes the model earliest?

Residual Income Model!!

Return on Equity ? use what Equity

Return on Equity : N/I ÷ Beginning OR Average Shareholder Equity for Period case by base

APT?

Returned are derived from a multifactor model no arbitrage opportunities exist no unsystematic risk (completed diversified away)

cash collection from customers?

Revenue + decrease in A/R + increase in unearned revenue

Formula for Sales?

Revenue= Cash collected from customers + Increases in accounts receivables - Increases in Deferred Revenue

Formula for Equity Index forwards at t ?

S/(exp^(compound rate x (T-t) / 360) - Forward Price/(exp^(RfR x (T-t) /360)

synthetic CDO vs cash CDO, which one is higher credit risk?

SAME! the difference between these twos are that with synthetic CDOs, the bondholders take on the risks of underlying assets but DO NOT take legal ownership

Activity Ratio?

Sales/Assets or Sales/(Avg Account receivables)

Equity Reversion after tax - show calculation

Selling Price - Selling Cost - Capital gain tax - Recaptured depreciation tax - Mortgage Balance *mortgage balance = FV of the loan less loan service payments reduced by interest paid

how do you replicate long FRA position?

Selling the floor and buying the cap at the same time

optimal choice with Sharp ratio?

Sharp Ratio of existing portfolio x correlation with new asses if New Sharp exceeds it then add it

What is the slope of the Capital Market Line?

Sharpe ratio for the optimal risky portfolio: (Return - RfR) / (St dev)

Protection buyer is long or short the credit?

Short the credit in underlying and delivers the reference obligation to the buyer Insurance firms take a long position in the underlying asset by selling protection in the CDS or other derivatives market.

How do you find Market price of risk in the graph?

Slope of market portfolio

Amortization of long-term bond premium is added back or subtracted to calculate FCFF?

Subtracted

average life of tranche?

Sum of month x principal payments divided by 12 * Tranche Amounts

Root Mean Square Error (RMSE).?

Take diff between actual and estimated value then, square it and sum it ans mean it to get st dev, that's it

Intrinsic P/E?

Tangible P/E + Franchise P/E

Which WACC should be used in valuing private equity? acquire's WACC? target WACC?

Target WACC

PSA Public Securities Association Prepayment Benchmark ?

The PSA benchmark is for CPR to be 0.2% in the first month of a new pool, increasing 0.2% each month for the first 30 months, and then remaining at 6% for the life of the pool. If t < 30 then CPR = 6% x t / 30; If t >= 30 then CPR = 6%.

What is ABO?

The accumulated benefit obligation (ABO) reflects the present value of pension benefits earned at the balance sheet date based on compensation to date. It is based on CURRENT SALARY levels. It is useful if the company is expected to settle the liability on a currently basis such as through a plan settlement. RATE of COMPENSATION INCREASE NOT AFFECTED!!!!! Basically, the ABO is the recalculation of the PBO without taking into account projected salary increases.

what is zero-cost collar?

The cap and floor rates are set so that the premium paid for the long position is equal to the premium received for the short position

How are the derivatives that used to hedge Future cash flows such as future energy price etc exposure reported in the financial statement?

The effective portion of the g/l will be reported in OCI under shareholders' equity. Once forecasted transaction affects earnings then it will be recognized in G/L statement.

The higher volatility of interest rates, then lower or higher Callable bonds and Putable Bonds

The higher vol, then lower the value of Callable bonds, higher the value of Putable Bonds

What is inventory reported on the balance sheet under U.S. GAAP?

The inventory is reported on the balance sheet at the lower of cost or market under U.S. GAAP

What is inventory reported on the balance sheet under IFRS?

The inventory is reported on the balance sheet at the lower of cost or net realizeable value under IFRS

what are mezzannie tranche and equity tranche?

The mezzanine tranche is still investment grade but usually rated in the mid or lower grades.(senior to the Equity but lower in priority to the Senior Debt) The equity tranche is usually rated as non-investment grade.

Unearned Revenue (deferred revenue)?

The revenue is actually collected before it is earned. (Any collections of cash for a good or service not yet provided ) Deferred revenue refers to an item that will initially be recorded as a liability, but is expected to become an asset over time and/or through the normal operations of the business.

formula for t-stats?

The t statistic is the coefficient divided by its standard error

what is VBO?

The vested benefit obligation (VBO) is the amount of the benefit obligation that does NOT depend on future employee service. It is based on vested benefits. RATE of COMPENSATION INCREASE NOT AFFECTED!!!!! Most companies have a vesting requirement, which means that the participant has to work for the company for some period of time to be entitled to full pension benefits. The VBO will be a percentage of the ABO.

What is the required disclosure to all clients and potential clients under soft dollar agreements?

To all clients and potential clients: IM must disclose whether it may use the Research to benefit clients other than those whose trades generated including PRINCIPAL basis.

What is the required disclosure to all clients (not potential clients) under soft dollar agreements?

To current clients ONLY: i) type of research received through proprietary or third-party research agreements ii) the extent of use (使用範囲） iii) whether any affiliated brokers involved.

Formula for EV?

Total MV of Debt + Common Equity + Preferred Equity - Cash and short term investments

For Operating Expenses, which standard differentiates bethween expenses and losses IFRS or U.S. GAAP?

U.S. GAAP differentiates between expenses and losses.

What are Provisions?

UNDERSTATING reported BV Provisions are nonfinancial liabilities that are uncertain as to their timing or amount. Examples: warranty obligations and contingencies IFRS uses Provisions **U.S.GAAP does not use the term Provisions

5 steps of Valuation Process

Understanding the business Forecasting company performance Selecting the appropriate valuation model Converting forecast to a valuation Applying the valuation to conclusion

what is the efficient frontier?

Upper portion of the minimum-variance portfolio. It represents all combinations of mean return and variance or standard deviaiton of return can be attained by holding efficient portfolio.

What ratio to be used in determining efficiency in the use of assets? AND what is the formula?

Use Asset Turnover Ratio Sales/Assets = ROA / Net profit Margin

Value given EBIT and WACC rate

V = EBIT(1-t)/WACC

PVGO?

V0 - E1/r

static spread vs OAS?

Whereas static spread treats the bond's cash flows as fixed and known with certainty, OAS takes into account how the cash flows might change as interest rate change. Thus, OAS takes into account the value of the embedded option

Equivalent Annual Annuity method

With I/Y -> required rate N -> investment horizon PV -> NPV FV -> stay as default then Find -> PMT

Z-spread can be used for MBS?

Zero-volatility spread can stil be used to value an asset backed security if it does NOT have a prepayment option or even the borrow has the right to prepay but it does not tend to exercise then OK to use Z-spread

style drift?

a change in the hedge fund's investment strategy from what was defined in the hedge fund's offering documents. the hedge fund in multistrategy is expected to move between asset sectors and trading strategies.

what is required in determing the optimal allocation to the market portfolio?

a estimate of its expected reutrn and variance, suggesting delegation of some analysis to professionals

payer swap? replicate it with options

a long interest rate call and a short interest rate put

passive or active - perfect market timing strategy

a passive strategy, proving good surprises its risk measure should not use standard measure for portfolio risk

unit root?

a series trends upward or downward over time often has a unit root and thus not covariance stationary therefore AR1 regression on the undifferenced serires is not correct to remedy the unit root issue, to take difference the data e.g. sales(t) - sales(t-1) unit root=1 non stationary also lag coefficient greater than 1 is nonstationary Dicky Fueller test unit root means two series are cointegrated

receiver swap? eplicate it with options

a short call and a long put at the same strike

PPE growing faster than revenue indicate?

a warning sign of a company deferring expenses!!!

source of value creation in private equity company?

ability to re engineer the firm and operate it more efficiently ability to obtain debt financial on more advantageous terms superior alignment of interests between management and private equity ownership

office building tell me characteristics

active, moderately liquid, tax depreciation, high income, similar to apartments

Pastor Stambaugh model?

adds a liquidity premium to Fama-French Model

prepayment burnout?

after 30 month, even though underlying mortage rate increases, the less prepayments are projected due to refinance at a lower rate

what are the stock specific factors in private equity?

all NEGATIVE factors liquidity of equity interests in business concentration of control potential agreements restricting liquidity

broken/busted PAC?

all of its support trache already paid off ( no more support)

Removal for cause

allow a GP to be FIRED if majority usually 75% votes

material adverse change clause provision?

allow a bank to reduce fundings if the bank feels that the borrowers financial condition or operating position has deteriorated significantly this is a weaker form of backupp credit facility

Removal for cause?

allows a GP to be fired if a supermajority (75%?) votes

Divorce for cause?

allows for the firing of a manager or termination of a fund given criminal action such as a felony conviction

open-end funds?

always at NAV such as mutual funds -cannot be short, margined -time lag for execution

How Equity recorded under Acquisition Method?

approach #1 simply add non-controlling interest to acquire's total asset approach #2 Capital Stock Par Amount = Initial +Issued Stock (if applicable) Additional Paid In = Excess over PAR is added to Initial Retained Earning -> at acquisition date acquiree's it will not be recorded ONLY the initial R/E

when to use EV/EBITDA?

appropriate to compare companies with different financial leverage

CDO is categorized in two types what are they?

arbitrage and balance sheet transactions

tender offer

ask and purchase directly from shareholders

white knight defense?

ask third party to buy me

white squire defense?

ask third party to buy partial me

benefit paid will decrease what?

benefit paid will decrease Pension obligation AND pension assets

limitation on using T-bills and coupons?

callable, different price etc many kinds of treasuries are available in a maturity

when to use OAS, what type of bonds?

callable, putable, agency debenture bond

what are the things affect traditional methods of performance measurements in hedge funds?

changes in leverage (fixed income funds use higher leverage. It is common not to adjust benchmark for leverage) changes in hedging techniques (zero beta, paying options premium to hedge) style drift portfolio turnover

Tell me characteristics with commodity investment

commodity is a asset class even thought they do not provide periodic cash-flow because it provides diversification benefits in high inflation, it provides benefit due to HIGH correlation actively managed commodity can provide POSITIVE REUTRN at any time

golden parachute?

compensation to senior management to stay

pac man defense?

counter bid

4Cs of credit risk?

covenants, collateral, capacity, character

six key area in the softdollar standards focus on?

definitions research mixed use products disclosure record keeping client directed brokerage

what are the limitations of the direct capitalization approach?

difficult to estimate a capitalization rate accurately, also difficulty of application to income producing property

Externalities?

e.g. Pollution

what represents the true cost of the pension?

economic pension expense

Given ROA, how do calculate financial leverage?

financial leverage= Assets/Equity ROE / ROA (Ret/Eq * Asset/Ret)

how does physical capital grow by?

grow by 1, saving 2, investment decisions

what does classical growth theory say?

growth is temporary and when economy grows above the subsistence level, a popoulation explosion eventually brings it back to the subsistent level. "techonology does not matter, it will always push back to the subsistence level"

Given delta, what is hedge ratio?

hedge ration = (1/delta)

lower accruals ratio indicate

higher quality earning

Key man clause?

if a key executive leaves or does not spend sufficient time, then GP is NOT allowed to invest further money

Bear hug?

ignoring CEO, negotiate directly with Boards

what is the local expectations form of the pure expections theory?

in the long term interest rate and reinvestment risks are important. In the short term these risks are ignored and investors are assumed to be indifferent between different instruments.

What are the problems related to instability in the minimum-variance frontier?

inputs(means, variances, covariances) are unknown ->great uncertainty historical sample estimates often change over time causing the estimated efficient frontier to change over time small changes in the inputs can cause large changes in the efficient frontier (called overfitting problem) 0 causing large short position and overly frequent rebalancing

how does increase in inventory affect revenue?

inventory change has nothing to do with Revenue increase in inventory rather affected by understating expenses, inefficient working capital management

What are the risks exposed with hedge funds investment?

investment risk fraud risk operational risk

Uncovered interest rate parity?

it is an economic theory about EXPECTATIONS not explained by interest rates parity, nor purchasing power parity nor fischer rate parity.

Agency risk in private equity?

it is only borne by investors NOT manager of private equity company. agency risk is private equity managers act their own interest rather than investors and interests of company

what does high earnings quality result in?

it will improve the ability to predict future earnings

shopping centers tell me characteristics

liquidity limited, periodic income and value appreciation, moderately active

The tangency portfolio for CML is known as...?

market portfolio

agency risk?

mgmt make decisions in itw own self interest rather than shareholders

more defaults on soverign debts in foregn ccy or local ccy

more in foreign ccy denominated debt gov. needs to buy foreign ccy to satisfy periodic bond payments but less exposure in local ccy

warehouses tell me characteristics

most PASSIVE, long-term, moderately liquid, VERY HIGH periodic cashflow

what the absolute value of lag coefficient value b1 must be in order to be covariance stationary?

must be less than 1, if it is 1 then it is called unit root

what adjustment is needed when stock option is not exercised during the exercible period?

no adjustment is needed.

prepayment risk on non-amortizing loand

no prepayment risk as ...non-amortizing loan is a type of loan payments on the principal are not made, while interest payments or minimum payments are made regularly. The principal is then paid as a lump sum at the maturity of the loan.

omitted variable bias?

omitted an important independent variable if the omitted variable is correlated with other independent variables then, biased and inconsistent also, standard errors are inconsistent

Static trade off theory?

optimal level of deb , trade off at tax shield versus the value of financial DISTRESS cost

capture hypotethis?

people in the industry will be asked to regulate. People who know the most are already in industry so they can capture the benefit

rating transition table?

percentage of issues of each rating was downgraded or upgraded during the period

periodic inventory system vs perpetual inventory system?

periodic inventory values and COGS are determined at the end of the account period more volatile perpetual inventory system continuous updated usually less volatile

what does physical capital grow?

physical capital will increase the labor productivity, which was the main driver during Industrial Revolution

cash flow analysis can be perfomed on what level?

pool level or loan level

estimated DPS?

previous DPS + Δincrease in EPS x p/o x (1/# years to adjust)

backwardation is?

prices that are volatile and at historic lows?

PAC tranche?

protection against both contraction risk and extension risk of prepayment risks using support tranche (it exposes to the largest prepayment risks) the less the support trache, the more prepayment risk to PAC

banks in CDS are?

protectiono buyer (BUY CDS) to hedge their loan portfolio

what are the tests imposed in cash flow structure in CDO?

quality tests including asset diversity score, minimum weighted average rating, maturity restrictions) and coverage test(ensure performance of the colalteral is sufficient to make payments, int coverage ratio etc)

Fama-French Model?

r = Rfr + βmkt x RMRF + βsize x SMB + βvalue x HML SMB is larger as size is smaller HML value firm is higher and growth is lowe value implying financial distress

correlation significant test?

r(n-2)^0.5/(1-r^2)^0.5

Dividends in equity method?

reduce the carrying amount of the investment in Balance sheet but not reported in the P/L.

The estimation of beta is affected by..?

regression to the mean, volume of trading and the market proxy used

greenmail?

repurchase the shares

how is a syntheic CDO return to the junior note holders is caluculated?

return from a portfolio high-quality debt + premium received in the CDS, reduced by the payment made for the credit event

Mean Variance Analysis assumption and preconditions?

risk averse investors, expected returns, variance of returns, covariance are known no tax, no transaction costs

how is the risk determined in PM process?

risk is determined by the amount of assets relative to needs

what is the problem with using historical means, variances and correlations in obtaining the inputs to the mean-variance framework?

sample is too large large estimation erros

Total asset for Proportionate Method?

say A is buying B for 50% owenership, total consolidated assiet is (A + B x 50%) - A's investments in B

crown jewel?

sell segment to third party so the buyer gives up

what does increase obligations and economic expense of the period?

service costs, interest costs, actuarial gains and losses, foreign exchange impact, past service costs

homemade divides?

shareholders can sell their shares to create their own cash-flow stream so dividends irrelevant

what does active portfolio manager maximize?

sharpe ratio

what is the required value in calculating effective duration and convexity?

shifting the one-the-run yield curve, calculating a new binominal interest rat tree, and then determing the required vlalues after adjusting the tree by adding the OAS at each note

what is the impact on ROA with pension liability?

since pension accounting netting out the obligation and assets, it will overestimate the ROA

Performance disclosure and confidentiality for private equity from GP?

specifies the fund performance information that can be disclosed but NOTE the performance for UNDERLYING is not disclosed

multiple discriminant analysis?

statistical classifcication technique to use for predicting corporate bankruptcies

credit risk models?

strucural models and reduced form models

The larger the t-Statistic of Autocorrelation, what does it indicate?

t-statistic for autocorrelation is significant to you need to MODIFY it!!!!!

what are the required record keeping in softdollar agreement?

that are required by law that are necesarry to supply clients on a timely basis document arrangements, oral or writen obligaiton document agreement with broker document transaction with broker, a list of research provider and product description document the bases of allocation to determine Mixed Use service indicate how the services obtained and how it is directely asisst in decision making process IDs of IM personnel and copies of client agreement about disclosure and authorization

what R^2 used in n x R^2 of BP test?

the BP test's R^2 is equal to regression of squared residuals of the original regression

key to quality of collateral?

the amount of euqity the borrower has in the asset

how should an audit committee be held and be composed of?

the audio committee should have at lease two members that have relevant accounting and auditing experience and they are independent directors. also, the internal audit staff for the firm should report directly to the audit committee and the committee should meet with external auditors at lease once annually without management present.

When does an abandonment option should take place?

the cash flow from abandoning a project EXCEEDS the present value of the cash flows form continuing the project

when does multiple IRR occur?

the cash flows from an investment reverse signs

what is corridor method?

the changes in actuarial assumptions are accumulated with the deferred gains and losses result from the differences in the expected and the actual return on assets. Once the accumulated deferred g/l exceeds more than 10%, it starts getting amortized, the threshold is called corridor. The amortization of deferred gains will REDUCE pension expense, amortization of the deferred losses will INCREASE pension expense.

how does it affect Balance sheet or income statement for futures contracts gain loss?

the effective portions of the HEDGES were recognized in OCI

what are the items that can decrease pension obligations?

the expected return on the pension plan assets

improving FFO/Total Debts and FOCF/Total Debt ratios indicate?

the financial flexibility of the company has improved

net portfolio yield for credit card deal?

the gross portfolio yield minus charge-offs

autoregressive model?

the independent varibale is a lagged value of the dependent variable

10-K filing?

the management discussion and analysis it provides off-balance sheet arrangements

In the market model, what is the covariance between asset i and j

the product of their betas and the variance of the market portfolio as follows : Cov(i,j)= β(i) x β(j) x σ(m)^2 where σ(m)^2 - variance for the market portfolio

rates theory, name three

the pure expectation theory (unbiased) ->short term rates the liquidity preference theory (biased) ->short term plus liquidity premium the preferred habitat theory (biased) yield premium, also demands and supply in each matuirty bucket

what is effective collar of PAC

the range of prepayment speeds over which the average life of the tranche is CONSTANT

hybrid vs true securitization?

the role of servicer is routine such as daily admi tasks for true securitizaton while the role of servicer generates cash flow in hybrid transaction

which risky portfolio should be combined with the risk-free asset?

the tangency portfolio

limitation on using Treasuries strips?

there is liquidity premiums on strips that are not present in treasury coupon tax treatment of strips is different from that of treasury coupons (accrued int on strips is taxed even thoh no cash is received tax advantage investor from non-US that are associated with strip

proxy fights?

through shareholder votes

GAAP vs IFRS funded status, adjustment in required in Asset, Equity Liability or what portion?

to decrease or increase liability and Equity

Relative valuation if earning is negative?

use earning yield (E/P). Regardless of its sign negative or positive, the higher value is underpriced stock

What debt rate to be used to calculate N/I from EBIT Residual Income?

use pre-tax debt rate as it will double counting tax if you use after-tax rate

what is it based on in valuing venture capital financing?

valuations are usually based on negotiation

deferment peirod and grace period for student loan ?

when at school, no payments are made by the sutdent, its called deferment period after graduated, approx 6months no payment is made, called grace period

when typically not having "style drift"?

when strategy is multi-strategies, style drift will not likely occur as multi strategy moves in between assets (allocation between equity vs bonds etc)

When collateral is amortizing assets, then principal repayments are?

will be distributed to bondholders

wrapping?

wrapping refers to a third party guarantee from a monoline insurer

Variance of risk-free assets?

zero

what is the expected mean value in forecasting volatility?

zero

Demonstrate Calculation of WCInv

Δ in CA (excluding cash and cash equivalents) - Δ in CL (excluding notes payable)

Formula for Market Value Added? Also give an alternative definition

Σ (EPn)/(1 + WACC) ^n (#of common shares x current price) - (Total capital) where Total Capital equals Total Assets also equals total MV of equity plus long-term debt and preferred stock same as NPV!!!!

Formula for portfolio standard deviation?

σ(p) = √[ (σ^2 x ((1-p)/n + p) ] as n gets larger, then it will be close to √(σ^2 x p )

portfolio risk for an equally weighted portfolio

σ(p)^2= (1/n) x σ(i)^2 + (n-1)/n x Avg.Covariance where σ(i)^2 - average variance of all assests as n gets larger it's closed to Cov.

Currency Swap Value at t?

(1) Calculate PV of both in foreign and local ccy for fix side: fix rate x [discount factor1 +....discount factor(n)] + ( 1 x discount factor(n)) floating side: [1 + the first schedule floating rate] x discount factor1 (2) for foreign adjust with foreign exchange rate (3) Take difference of (2)

Formula of Acid Test

(CA-Inv)/CL

how do you calculate BVPS?

(Common shareholders equity) ______________________________ (# of common stock shares) *goodwill, intangible assets should be removed before calculation

Formula for H model?

(D0 x (1 + g(lower)) +D0 x H x (g(higher) - g(lower) ____________________________________________ (r - g(lower))

times interest earned?

(EBIT) / (the total interest payable on total debts)

what is tag-along, drag-along clauses?

(Management's RIGHT to buy an equity stake) when acquirer acquires control of the company, they must extend the acquisition offer to all shareholders including firm management

conversion value for CB?

(Market price of common stock) x (Conversion ratio) ***the value of the convertible bond if it is immediately converted into the common stock

ROIC?

(Operating profit after tax) ______________________________ (Total Invested capital) what is total invested capital? Enterprise Value + cash +cash equivalents and short term investments

Capital gain tax - show calculation

(Selling Price - Selling Costs) - Purchased price x Capital gain tax %

Net Operating Asset?

(Total Assets - Cash) - (Total Liabilities - total deb)

V(estimate) - V(market) = ?

(V(intrinsic) - V(market)) + (V(estimate) -V(intrinsic))

formula for effective duration?

(V+ - V-)/[2 x yield change x V]

short term solvency ratios? Give formula

(a) the current ratio, (b) the acid-test ratio, (c) the inventory turnover ratio, and (d) the accounts receivable turnover ratio.

premium payback period

(market conversion premium per share)/(Favorable income differeial per share) **favorable income per share [coupon from convertible bonds - (conversion ratio x dividends)] / (conversion ratio)

Enumerate the items typically appeared under Net periodic pension benefit costs

+ Current service costs + Interest cost + Amortization of Net deferred losses and (gain) with actuarial changes + Amortization of past service costs - Expected Return on Assets

State types of valuations approached used in private company

- Income approached, including free cash flow method that is used to value larger and mature stage company, capitalized cash flow method and residual income method for smaller company and special situations. - Market approach, guideline public company method, guideline transactions method, prior transactions method - Asset Base approach, which is infrequently used for operating firms but will be used for liquidating company and very small firms or recently formed firms

what are the warning signs of financial reporting in Revenue section?

-Large increases in accounts receivable -Large decreases in unearned revenue -Large swings in the ratio of revenue-to-cash collected from customer -Recognizing revenue early

what is non-controlling interest?

-generally seen under Acquisition method Also known as minority interests, are balance sheet item under subsidiary's equity (residual interest) held by third parties under full goodwill method non-controlling% x FV of the subsidiary under partial goodwill method non-controlling% x FV of net identifiable asset

what are the three methodologies in constructing theoretical spot rate curve?

1) bootstrapping when the universe is on-the-run Treasury issues with or without off-the-run issues 2) econometric modeling for all Treasury coupon securitiees and bills 3)simply the obserbed yields on th Treasury coupon strips

How do you settle a CDS when a credit even occures?

1) cash settlement simply paying Par Amount to Protction Buyer 2) physical settlement, protection seller pays par amount to buyer and protection buyer delivers the reference obligation

what are the possible two reasons as to the difference of callable bond valuation given the same binominal and same on-the-run treasuries used?

1) different volatility assumption 2) the call rule used by the two may be quite different

advantages of CDS?

1) easy to go short the credit, 2) liquidity is growing, 3)more confidentiality assured due to OTC transaction

what are the items that can increase pension obligations?

1) employee's service during the period 2) interest expense accrued on the beginning pension obligation 3) changes to the terms of pension plan for the previous period relating to employee's services 4) actuarial gains and losses related to changes made to the assumption including employee turnover, mortality rates, retirement ages, compensation increases

what are the advantages of using swap rate curve?

1) no government regulation across different markets 2) suplly of swaps depends ONLY on the number of counterparties 3)easier comparison across countreis 4) many maturity points available

Give two definitions of economic pension expense

1) summing all of the changes in PBO for the period excluding employer's contribution and subtracting the actual return on assets 2) changes in the funded status for the period excluding the firm's contribution

how is a typical CDO like?

1)a senior tranche 70-80% with a floating rate 2)then different layers of subordinate or junior debt tranches with a fix rate 3)an equity tranche

Give formulate of Capitalization ratio for both long-term and total debt capitalization

1, (long-term debt)/(long-term debt +shareholder equity including minotiry int) 2, (CL + long-term debt)/(CL + long-term debt +shareholder equity including minotiry int)

Give steps for the POST money valuation

1, EXIT VALUE / (1 + IRR) ^t to get the Present Value 2, Present Value - Capital Needs 3, Enterprenuer's (owers) share is (2)/ (1) 4, PE share is Capital Needs / EXIT VALUE

Cash-flow after tax for real estate - show steps

1, Find tax by (NOI - depreciation - annual interest expense) x (tax rate) 2, NOI - (debt service) - (tax from step 1) **debt service = 12 x monthly interest payment

excess earning method - show steps to calculate

1, Find the intangible value with the following = Normalized N/I - Required return on Working Capital x WC Balance - Required return on FCInv x FCInv (FV) 2, Find the value of intangible assets = [(1) x long-term growth rate of residual income] ________________________________________________ ( required return on intangible assets - g) 3, MV of invested capital = MV of fixed assets + Working Capital + Intangible Assets

How to calculate the Capitalization Rate with Band-of-Investment Method - Show steps

1, N= Year x 12 2, I/Y= Interest Rate/12 3, PV= Default 4, FV= -1 5, Find PMT 6, PMT x 12 7, Add the interest rate on the mortgage to (6) 8, Weighted Average it, (7) x % Debt + Rate for Equity x % Equity

Black Scholes Model assumptions are?

1, NO arbitrate take place 2, Asset price follow a lognormal distribution 3, Volatility of the underlying is constant 4, Market are frictionless 5, Asses has no cash flow 6, European Style Option

What are the three accounting issues under Business Combination?

1, Recognition and measurement of identifiable assets and liabilities acquiree's previously recognized assets and patents brand name etc., contingent liabilities, indemnification(保証) assets 2, the initial recognition and subsequent accounting for goodwill partial goodwill vs full goodwill 3, recognition and measurement of the non-controlling interest bargain acquisition

Name types of projects in Corporate Finance

1, Replacement project 2, Expansion project 3, New products and services 4, Regulatory, safety and environmental projects and more..

Steps to take for emerging market valuation?

1, With real base, find depreciation = (beginning PPE Balance) / # of depreciable years 2, With real base, FC Inv = (PPE end - PPE beg) + Depreciation 3, Find nominal base with inflation index for revenue and nominal FC Inv 4, Nominal PPE = Beng PPE - Dep + (FCInv for Real base x Infation index) 5, find nominal tax 6, Convert nominal tax to real 7, Evaluate Real NOPLAT which is (EBITA -tax)

limitation on using all on-the-run Treasuries to contruct yield curve?

1, a large gap between maturuties 2, information is lost about the yield on other treasuries 3, market distrotion by repor market

What are the sources for economic growth?

1, aggregate hours 2, labor productivity

valutation model generating an int rates tree based on

1, benchmark int rates 2, assumed int rate volatility 3, interest rate model

how is the principal prepayment can be made in credit card backed secruties?

1, bullet payment at lump sum, controlled amortization structure, or passthrough structure

How to find Market Value of invested capital with Excess earning method?

1, calculate returns to Working Capital and Fixed Asses by W=Working Capital x required rate for Working Capital F=Fixed Capital x required rate for Fixed Capital The residual Income for intangible assets = Normalized Earning - W - F Then, Find value of intangible asset by The Residual Income for intangible assets x ( 1+ growth rate for residual income) / (required rate of return for intangible asset - growth rate for residual income) MV of invested capital = Total working capital + total fixed capital + the value of intangible asset

why convertible bonds are multioptions? Specify what options

1, call options 2, convertible options thus, valuing CB is complicated as it includeds valutions on future price of underlying stock and future interest rate

Impairment loss under GAAP show steps

1, check by comparing the net BV to UNDISCOUNTED CASH FLOWS and if NBV is greater then impairment loss is BV(carrying amount) - Asset's fair Value

Tell me control mechanisms in private equity that you know

1, compensation 2, tag-along, drag-along (Management's RIGHT to buy an equity stake) 3, board representation 4, noncompete clauses 5, priority in claims 6, required approvals 7, earn-outs

Name strategies of credit derivatives

1, curve trade 2, basis trade, 3, index trade, 4, options trade, 5, correlation trade 6, capital structure trade

three levels to determine research

1, define the product or service 2, determine usage whether it is primary usage or not 3, mixed use analysis

What are the Private Equity Valuation methods?

1, discounted cash flow analysis (long history) 2, relative value/market approach (e.g. P/E, long history and predictable cash flows) 3, real option analysis (for immature firms) 4, replacement cost (for immature firms) 5, venture capital method, leveraged buyout method

What are the steps to take in constructing minimum-variance frontier?

1, estimation step (estimate the expected return and variance for each individual asset and the correlation) 2, optimization step (solve for the weights that minimize the portfolio variance subject to the following constraints) 3, calculation step ( calculate the expected returns and variances for all the minimum variance portfolios in optimization step)

When to use P/B?.. give three situations

1, for liquidation stage 2, company has liquid assets, finance and insurance company typically fits in this 3, earning is volatile and not reliable

What are the data shortcomings with hedge fund index data?

1, fund listing is up to individual hedge fund managers 2, indexes include many small funds and MISS some LARGE funds 3, data from hedge funds are not verified by index publishers

What are the planning steps in PM construction?

1, identify the investment objectives and constraints 2, create an investment policy statement 3, fora set of capital maqrket expectations 4, determine a strategic asset allocation

what are the preconditions for economic growth?

1, markets 2, property right 3, monetary exchnge

what is efficient frontier?

1, minimum risk of all portfolios with the same expected return 2, maximum expected return for all portfolios with the same risk this is the upper shape(concave portion) of the minimum-variance frontier looks like "く" みたいな shape

check points as to whether appropriate approach is used ?

1, model fits the characteristic? 2, based on the quality and the availability of input data? 3, suitable given the purpose of the analysis?

what are call provisions given to the trustee?

1, perceent of collateral call, 2, percent of bonds, 3, percent of tranche, 4, call on or after specified date, 5, latter of percent or date or 6, auction call

what steps to take in estimating a future equity risk premium?

1, select an equity index 2, select a time period 3, calculate the mean return on the index 4, select a proxy for the risk-free rate

three sets of ratio to assess the ability of a firm to repy debt obligation

1, short term solvency ratio 2, financial leverage (debt to equity) 3, coverage ratio

how does growth account suggest in achieving the following objectives for economic growth?, growth of physical and human capital and technological advance?

1, stimulate saving 2, stimulate research and development 3, target high-technology industries 4, encourage international trade 5, improve the quality of education

2 forms of Acquisitions?

1, stock purchase -> shareholders pays capital gains tax in any 2, asset purchase-> corporate firms pays capital gains tax in any

what are the models for credit risk analysis, and explain each

1, strucual models.(a.k.a. firm value model) is the Black Scholes option pricing model. This model says a company defaults on its debt if the value of the assets falls below a certain default point.(driven by expected volatility of assets value level). Depends on the corporation structual characteristic! 2, Reduced form models, this model does not look at structure(inside), they directly look at the probability of defaul or downgrade. default process and recovery process are independent each other

How do you calculate Root mean squared error (RMSE)?

1, take diff between actual vs forecast of each value then square it each row 2, Sum it 3, AVERAGE it first 4, √ it *note the lower RMSE value the more accurate th data is

What are the sources of value creation in private equity?

1, the ability to re-engineer the firm efficiently 2, ability to obtain debt financing more advantageously 3, superior alignment of interests between management and private equity owenership

What are the methods of obtaining the inputs to the mean-variance framework?

1, using historical means, variance and correlations 2, estimating betas using the market model 3, calculating adjusted betas

what are the three obligations used under GAAP and explain each?

1, vested benefit obligation - actuarial PV of vested benefits. 2, accumulated benefit obligation - actuarial PV of vested and unvested obligation IGNORING future salary increases. (current basis of pension liability - relevant for liquidating company) 3, projected benefit obligation - the actuarial PV as of a date of all benefits attributed by the pension benefit based on future compensation level

what will change aggregate (labor) hours?

1, working-age population growth. 2, changes in the employment-to-population ratio 3, changes in average hours per worker

standard error of the autocorrelation?

1/(T)^0.5 where T is # of observations

Formula for inflation passthrough?

1/(r + (1-passthr rate) x infl rate)

Formula for Adjusted Beta?

2/3 x β + 1/3

Quiet period recommended?

30 days for IPO 10 days for Secondary Offer

1. All securities reclassified --> from one category to another --> are transferred at fair value 2. From Trading to Other --> Unrealized Holding Gain and Loss (HGL) at transfer date --> already recognized in earnings --> not reversed 3. From Other to Trading --> Unrealized Holding Gain and Loss (HGL) at transfer date --> recognized in earnings immediately

4. From HTM to AFS --> Unrealized Holding Gain and Loss (HGL) at transfer date --> recognized in OCI 5. From AFS to HTM --> Unrealized Holding Gain and Loss (HGL) at transfer date --> stays in OCI --> amortized over remaining life of security 6. Following transfers should be rare --> from HTM to Other --> from Trading to Other --> from Other to Trading

hotels and motel tell me characterisitcs

ACTIVE, moderately liquid, periodic income

Available for Sale vs Held for Trading - when to use?

AFS is used for long-term investment HFT is short term holding

Multifactor Models vs APT?

APT is cross sectional variations across assets vs Multifacor model is a time-series regression of variation over time. APT no arbitrage, no unsystematic risk (all diversified away) Intercept in macroeconomics factor model is the asset's expected return, derived from APT. APT intercept is the risk-free rate.

ARMA (autoregressive moving average) model, its severe limitations are..?

ARMA combines both autoregressive lags of the independent variable and moving average erros. 1, the parameters in ARMA models can be very unstable. 2, choosing the right ARMA model is extremely difficult. It appears ARMA needs many smaple size and this model is not stable

Cash flow accrual ratio ?

Accruals = NI - CFO - CFI Cash flow accrual ratio = Accruals / Net operating assets

Consolidated depreciation and amortization expense under Acquisition method are?

Acquire's Depreciation expense + Acquiree's Depreciation expense (100%) + Amortization of Excess atrributable of acquiree's previous recorded assets

State difference among acquisition, merger and consolidation

Acquisition ->segment purchase merger -> A + B = A (statutory merger) A + B = Ab (subsidy merger) Consolidation - > A+ B = C

what are the two (components) of Active Risk?

Active Factor Risk: Deviations of the portfolio's factor sensitivities vs the BMK's sensitivities e.g. industry Active Specific Risk: Active asset selections attributable to deviations of the portfolio's individual asset weightings vs. BMK e.g. individual stock

Active Risk(tracking risk) - give formula

Active Risk: √ [ Σ(R(p) - R(bmk))^2 / (n-1) ]

Information Ratio ?

Active return / St dev

hotels and motels - give characteristics

Active!! moderately/low liquid tax shelter income and value appreciation risks are competition

what does increase plan assets and decrease the economic expense of the period?

Actual returns on plan assets

formula for beta?

Asset A's Covariance with market return / Market Variance of Return

what pricing is used for monopoly regulator?

Average Cost Pricing, though monopoly company wants to price at MR=MC, regulator force an Average Cost Pricing

Perpetual Residual Income given r, g, BV, ROE, EPS

BV + (EPS - BV x r)/(r) g is not applicable here as it is PERPETUAL!

Intrinsic Value given R/I and BVPS

BVPS + (Residual Income)/r

(Balance sheet) accrual ratio ?

Balance sheet accrual ratio = ΔNet operating assets(YoY) / Average net operating assets Volatile accruals ratio are an indicator that a firm may be manipulating earnings. Increasing accruals ratios may be a sign that a firm may be manipulating earning. Lower accrual ratios represent higher earnings quality.

what is the Black model?

Black model is to price European options on intrest rates by entering the forward interest rate into the model for the forward or futures price and the exercise rate for the exercise price

Bootstrapping Earning?

By merging and consolidating, it aims to increase stock value and EPS. Then you can have sufficient funds from the increased stock value to make additional mergers and acquisitions

what is the difference between CAL assumption and efficient frontier assumption?

CAL assumptions include investors can have different expectations about returns, variances, and covariances.

CAL vs CML?

CAL can be multiple lines as investors share different expectations, while CML is universally one line with investors homogenous expectations. Tangency portfolio is only one with CML, while CAL can have multiple depending on differences investor expectations

CAPM vs APT

CAPM is less flexible because it only composes of Market Portfolio and RfR asset.

What is Basis trade?

CDS vs Asset Swap Spread(credit risk + funding risk) if CDS premium is higher than asset swap spread then the basis is POSITIVE. If CDS is tighter then NEGATIVE. Arbitrade risk and less names

COGS for FIFO from LIFO?

COGS(LIFO) - (change in LIFO reserve)

inventory turnover ratio and days of inventory on hands?

COGS/ AVG inventory DONT USE END OF YEAR VALUE Days of inventory = 365/Inv

Bonds (Fixed Income) Put is call or put?

Call

Interest Rate Cap is call or put?

Call

Positive and negative delta are?

Call are positive Delta - value of call option and underlying move in the same direction ALWAYS Puts are negative Delta - value of put and underlying move in the different direction ALWAYS

back-up credit facility with a highly rated commercial bank - which 4Cs of credit analysis is it?

Capacity

Demonstrate a typical DPI RVPI TVPI flow given such as Capital Called Down etc

Capital Called Down for each year PIC is the accumulative amount of Capital Called Down Mgmt Fee is based on PIC Operating Results NAV before distributions are (last year's NAV after) + capital called down -mgm fee + operating results Carried Interest - if applicable..use NAV before distributions vs Waterfall mim level x Carried Int rate from the next year simply diff in NAV before distributions x Carried Int Rate Distributions NAV after distibutions

CAL?

Capital allocation line adds a risk-free asset to the minimum-variance frontier(where risky assets only).

Disadvantages of using Equity Method?

Cash-flow does not capture One line consolidation does not capture economic sense such as Sales, debt ratios etc 20-50% does not ALWAYS mean significant influence

Modigiliani and Miller Proposition I is about? (no tax, no transaction costs, no bankruptcy costs, no agency costs, risk free rate)

Comapny's value is irrelevant of capital structure the level of debt does not matter MV of a company not affected by the capital structure of the company MM Proposition with Taxes : the decreased amount of debt with tax savings used then, the total value of the firm will DECREASE Managers cannot change the value of the company by using more or less debt.

Given β1, β2 for two assets and residual standard deviations σ(e)1, σ(e)2 and market standard deviation σ(mkt), calculate correlation for two assets

Correlation =(β1 x β2 x σ2(mkt)) / [ √(β12 x σ2(mkt) + σ2(e)1,) + √(β22 x σ2(mkt) + σ2(e)2) ]

Characteristics for country risks?

Country risk is diversifiable and one-sided risk

slope given Cov

Cov(Y,X)/VarX

Retained Earning - what rate is used under current rate method and temporal method?

Current Rate Method & Temporal Rate Method - 逆算 Begging + N/I - dividends paid at historical rate

Expenses - what rate is used under current rate method and temporal method?

Current Rate Method - Average Rate Temporal Rate Method - Average Rate

Revenue - what rate is used under current rate method and temporal method?

Current Rate Method - Average Rate Temporal Rate Method - Average Rate

COGS - what rate is used under current rate method and temporal method?

Current Rate Method - Average Rate Temporal Rate Method - Historical Rate

depreciation & amortization - what rate is used under current rate method and temporal method?

Current Rate Method - Average Rate Temporal Rate Method - Historical Rate

Accounts payable, short-term debs - what rate is used under current rate method and temporal method?