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BOOK 2 — ECONOMICS, CORPORATE FINANCE, AND PORTFOLIO MANAGEMENT Readings and Learning Outcome Statements 3 Study Session 4 — Economics: Economics for Valuation il Study Session 8 - Corporate Finance 103 Study Session 9 - Corporate Finance: Financing and Control Issues 155, Study Session 18 - Capital Market Theory and the Portfolio Management Process 224 Formulas 279 Index 284 Important Notice to Level 2 Candidates: In past years we have reprinted in our Study Notes questions and. guideline answers from previous Level 2 exams that were still relevant to the Level 2 curriculum as an additional tool to help you prepare for the CFA exam. This year CFA Instirute decided to no longer license the rights to previous Level 2 exam questions and guideline answers to prep providers. We encourage you to ‘use the Sample Exams in Book 6 of the Schweser Study Notes, the three additional practice exams in Schweser's Practice Exam Book, and one or mote of the four Online Practice Exams to replace these previous exam questions in your preparation for the Level 2 exam. If this book does not have a front and back cove, it was distibuted without permission of Schweser, a Division of Kaplan, Inc. and is in direc violation of global copyright laws. Your asistance in pursuing potential violators of this law is greatly appreciated. [Required CFA lnstture® disclaimer: “CEA® and Chartered Financial Analyst™ are trademarks owned by CFA Instinute, CFA Tnstcute formerly the Association for Investment Management and Research) does not endorse, promote, review, or warrant the accuracy ofthe products or serviss offered by Schweter Study Programn®,” : (Certain materials contained within this tex are che copyrighted property of CFA Insiute. The following isthe copyright disclosure for these smatcils: “Copytight, 2007, CEA Instnte. Reproduced and republished fom 2007 Learing Oncome Statements, Level 3 questions from CFA® Program Material CEA Instrute Stondads of Profesional Conduct, and CPA Insite’ Global neetment Parformance Standard with permission fiom CFA Instrue, All Rights Reserved” These materials may not be copied without writen permission from the author. The unauthorized duplication of these notes isa violation of global copyright laws andthe CEA Institute Code ofEshics, Your assistance in pursuing potential violator ofthis aw is realy appreciated. Disclaimer: The Schweset Notes shouldbe used in conjunction withthe original readings a set forth by CEA Instn in thet 2007 CEA Level 2 Study Guide The information contained in these Notes caves topic contained inthe reading referenced by CEA Insti and is belived to be accurate. However, cheiraccuracy cannot be guaranteed not i any warranty conveyed as to your ultimate exam suces. The authors ofthe referenced readings have not endorsed or sponsored these Notes, nor are hey afiated with SchweserSrudy Program. Page 2 ‘S2007 Schweser READINGS AND LEARNING OUTCOME STATEMENTS READINGS The following material is a review of the Economics, Corporate Finance, and Portfolio Management principles designed to address the learning outcome statements set forth by CFA Institute. STUDY SESSION 4 Reading Assignments 14. “Economic Growth,” Ch. 25, Economics, 7th edition, Michael Parkin (Addison Wesley, 2005) page 11 15. “Regulation and Antitrust Policy in a Globalized Economy,” Ch. 27, Economics Today, 12th edition, Roger LeRoy Miller (Addison Wesley, 2004) page 24 16. “The Economic Future of Asia,” Ch. 14, Flying on One Engine: The Bloomberg Book of Master Market Economists, Thomas R. Keene (Bloomberg, 2005) page 30 17. “Foreign Exchange,” Ch. 1, pp. 721, International Investments, Sth edition, Bruno Solnik and Dennis McLeavey (Addison Wesley, 2004) page 35 18. “Foreign Exchange Parity Relations,” Ch. 2, pp. 4-78, International Investments, Sth edition, Bruno Solnik and Dennis McLeavey (Addison Wesley, 2004) page 44 19. “International Asset Pricing,” Ch. 4, International Investments, 5th edition, Bruno Solnik and Dennis McLeavey (Addison Wesley, 2004) page 65 20. “Measuring Economic Activity.” Ch. 3, Guide to Economic Indicators: Making Sense of Economics, 5th edition, Richard Stutely (Bloomberg, 2003) page 89 21, “A Natural Experiment in Monetary Policy Covering Three Episodes of Growth and Decline in the Economy and the Stock Market,” Journal of Economic Perspectives 19, No. 4, Milton Friedman (2005) page 94 22. “The Demographic Deficit: How Aging Will Reduce Global Wealth,” The McKinsey Quarterly, Diana Farrell, Sacha Ghai, and Tim Shavers (McKinsey & Company, Inc., 2005) page 98 STUDY SESSION 8 Reading Assignments 35. “Capital Budgeting,” Corporate Finance, Level I, Volume 3, John D.-Stowe and Jacques R. Gagné (CFA Insticute, 2007) page 103 36. “Cost of Capital,” Corporate Finance, Level II, Volume 3, Yves Courtois, Gene C. Lai, and Pamela P. Peterson (CEA Institute, 2007) page 141 STUDY SESSION 9 Reading Assignments 37. “Corporate Governance,” Corporate Finance, Level II, Volume 3, Rebecca Todd McEnally and Kenneth Kim (CEA Institute, 2007) page 155 38. “Capital Structure and Leverage,” Corporate Finance, Level Il, Volume 3, Raj Aggarwal, Cynthia Harrington, Adam Kobor, and Pamela P. Peterson (CFA Institute, 2007) page 169 39. “Dividends and Dividend Policy,” Corporate Finance, Level Il, Volume 3, George H. ‘Troughton and Catherine E. Clark (CEA Institute, 2007) page 185 40. “Mergers,” Ch. 32, Principles of Corporate Finance, 8th edition, Richard A. Brealey, Stewart C. Meyers, and Franklin Allen (McGraw-Hill Irwin, 2006) page 200 ‘S2007 Schweser Page3