CFA Level II 公式

Contents
ETHICAL AND PROFESSIONAL STANDARDS..........................................................................5
QUANTITATIVE METHODS .........................................................................................................6
Hypothesis Testing ....................................................................................................................6
Test Population Means ..............................................................................................................6
·Difference in means test for independent samples Equal Variance..........................................6
Unequal Variance : ....................................................................................................................6
·Mean differences test for dependent samples...........................................................................6
Variance Tests............................................................................................................................6
Correlation Coefficient, r ..........................................................................................................7
Multiple Regression ..................................................................................................................7
Regression Analysis Problems ..................................................................................................7
ECONOMICS ...................................................................................................................................8
Growth Accounting Equation....................................................................................................8
Neoclassical Growth Theory.....................................................................................................8
Endogenous Growth Theory .....................................................................................................8
Factors Promoting Economic Growth.......................................................................................8
Purchasing Power Parity ...........................................................................................................8
International Fisher Relation.....................................................................................................8
Uncovered interest Rate Parity..................................................................................................9
Interest Rate Parity....................................................................................................................9
Asset Market Approach.............................................................................................................9
Currency Arbitrage....................................................................................................................9
Real Exchange Rate Risk ..........................................................................................................9
Foreign Currency Risk Premium (FCRP) ...............................................................................10
International CAPM................................................................................................................10
Currency Exposure..................................................................................................................10
Product Life Cycle ..................................................................................................................10
Regression to Mean.................................................................................................................10
PORTFOLIO MANAGEMENT .....................................................................................................11
Measuring Risk .......................................................................................................................11
Portfolio Risk and Return .......................................................................................................11
Efficient Frontier and Optimal Portfolio .................................................................................11
Systematic Risk vs. Unsystematic Risk ..................................................................................11
Capital Market Line(CML) .....................................................................................................12
SML and CAPM .....................................................................................................................12
SML vs. CML .........................................................................................................................12
Arbitrage Pricing Theory(APT) ..............................................................................................12
Testing CAPM.........................................................................................................................12
Multifactor Models .................................................................................................................13
Portfolio management Planning Process.................................................................................13
FINANCIAL STATEMENT ANALYSIS .......................................................................................14
Inventory Analysis ..................................................................................................................14

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CFA Level II 公式

Depreciation and Impairment..................................................................................................14
Off-Balance Sheet Debt ..........................................................................................................14
Lease Classification ................................................................................................................14
Effect of Classification on Lessor ...........................................................................................15
Marketable Securities Classification.......................................................................................15
Account for Inter-corporate Investments ................................................................................15
Business Combinations ...........................................................................................................15
Purchase Method: Constructing Consolidated Statements......................................................15
Effect of Pension Plan Assumptions .......................................................................................16
Pension Calculations ...............................................................................................................16
Pension Adjustments ...............................................................................................................16
Multinational Operations ........................................................................................................17
Cash Flow Measures ...............................................................................................................17
Basic and Diluted EPS ............................................................................................................17
Most Critical Ratios ................................................................................................................17
3-component DuPont: .............................................................................................................18
5-component DuPont: .............................................................................................................18
Sustainable Growth Rate.........................................................................................................18
CORPORATE FINANCE ...............................................................................................................19
Weighted Average Cost of Capital ..........................................................................................19
Capital Budgeting Expansion Project .....................................................................................19
Operating Leverage.................................................................................................................19
Financial Leverage..................................................................................................................19
Total Leverage.........................................................................................................................19
Optimal Capital Structure .......................................................................................................19
Dividend Signaling Hypothesis...............................................................................................19
Good Reasons for Mergers......................................................................................................19
Bad Reasons for Mergers ........................................................................................................19
NPV of Merger........................................................................................................................20
Takeover Defense Measures ...................................................................................................20
EQUITY INVESTMENTS .............................................................................................................21
Alpha.......................................................................................................................................21
Taxes and International Investing ...........................................................................................21
Methods to Reduce Execution Costs.......................................................................................21
American Depository Receipts (ADRs)..................................................................................21
Franchise Value and Growth Process ......................................................................................21
Inflation Effects on Valuation .................................................................................................21
Valuation in Emerging Markets...............................................................................................21
Porter’s Five Forces ................................................................................................................22
Generic Competitive Strategies...............................................................................................22
Industry Analysis.....................................................................................................................22
Discounted Cash Flow (DCF) Methods..................................................................................22
Gordon Growth Model (GGM)...............................................................................................23
Present Value of Growth Opportunities ..................................................................................23

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CFA Level II 公式

Two – Stage Growth Model ....................................................................................................23
H-Model..................................................................................................................................23
Solving for Required Return ...................................................................................................23
Strengths of multistage growth models:..................................................................................23
Limitations of multistage models:...........................................................................................24
Free Cash Flow to Firm (FCFF)..............................................................................................24
Free Cash Flow to Eqauity (FCFE).........................................................................................24
Single-Stage FCFF / FCFE Models ........................................................................................24
Two – Stage FCFF / FCFF Models .........................................................................................24
Price to Earnings (P/E) Ratio ..................................................................................................24
Justified P/E ............................................................................................................................24
Normalization Methods: .........................................................................................................25
Price to Book (P/B) Ratio .......................................................................................................25
Price to Sales (P/S) Ratio ........................................................................................................25
Price to Cash Flow Ratios.......................................................................................................25
Method of Comparables..........................................................................................................26
Residual Income (RI)Valuation...............................................................................................26
Economic Value Added ...........................................................................................................26
Growth Duration Model..........................................................................................................26
DEBT INVESTMENTS .................................................................................................................27
Credit Analysis........................................................................................................................27
Bond Price Yield Relationship ................................................................................................27
Duration and Convexity ..........................................................................................................28
Yield Curve(Term Structure ) Shifts .......................................................................................28
Theories of the Term Structure................................................................................................28
Key Rate Duration ..................................................................................................................28
Valuing Option Free Bonds.....................................................................................................28
Value Bond with Embedded Option........................................................................................29
Option Adjusted Spread ..........................................................................................................29
Convertible Bonds...................................................................................................................29
MBS Prepayment Risk............................................................................................................29
CMO prepayment Risk ...........................................................................................................30
ABS Prepayment Risk ............................................................................................................30
MBS /ABS spread Analysis ....................................................................................................30
DERIVATIVES ...............................................................................................................................31
Forwards-No Arbitrage Pricing...............................................................................................31
Equity Forward .......................................................................................................................31
Forward on Fixed Income securities .......................................................................................31
Forward Rate Agreements.......................................................................................................31
Currency Forward(Interest Rate Parity ).................................................................................31
Futures Price ...........................................................................................................................31
Futures Arbitrage.....................................................................................................................32
Treasury Bond Futures ............................................................................................................32
Equity Futures .........................................................................................................................32

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...............................................................................................................................................................................................................................................................................................................32 Binomial option Pricing Model.....34 4 .............................................33 Swap Pricing and Valuation ..........................CFA Level II 公式 Put-Call Parity.........................................................................................................................................................................................................................................................................................................................................................................................................................................................................................33 Delta Neutral Hedging ........................................................................................................32 Delta.......32 Caps and Floors....................................................................................................................................................................32 Black-Scholes Option Pricing Model..............................................33 Swptions................................................33 Currency Swaps .........................................................................................33 Gamma................................33 Equity Swaps .........................33 Interest Rate Swaps..............

6) Prohibition against misrepresentation IV(B.1) Fiduciary duties IV(B.2) Portfolio recommendations/actions IV(B.7) Disclosure of conflicts to clients IV(B.8) Disclosure of referral fees V Responsibilities to Public V(A) Don’t use material nonpublic info V(B) Performance presentation 5 .3) Independence and objectivity IV(B.2) Research reports IV (A.CFA Level II 公式 ETHICAL AND PROFESSIONAL STANDARDS I Fundamental Responsibilities I(A) Comply with laws Code/Standards I(B) Do noe participate/assits in violations II Responsibilities to Profession II (A ) Use of Professional designation II(B) professional nisconduct II(C) prohibition against plagiarism III Responsibilities to Employer III (A) Inform employer of Code/Standards III (B) duty to employer III (C) disclosure of conflicts to employer III (D)Disclosure of additional compensation III (E) Responsibilities of supervisors IV Responsibilities to Clients IV (A.5) Preservation of confidentiality IV(B.4) Priority of transactions IV(B.3) Fair dealing IV(B.1) Reasonable basis and represent tations IV (A.

t = . n1 + n2 − 2 df (n1 − 1) s12 + (n2 − 1) s22 s = n1 + n2 − 2 2 p Unequal Variance : t= ( x1 − x2 ) − ( µ1 − µ 2 ) 1/ 2 ⎛ s12 s22 ⎞ ⎜⎜ + ⎟⎟ ⎝ n1 n2 ⎠ ·Mean differences test for dependent samples t= d . n − 1. n − 1 df sd / n Variance Tests Population variance x 2 = (n − 1) s 2 Equality of variances : F = σ 02 . n1 − 1. df s/ n s/ n n<30 Z n≥30 Z Normal distribution Known variance Normal distribution t t or z Unknown variance ·Difference in means test for independent samples Equal Variance t= ( x1 − x2 ) − ( µ1 − µ 2 ) 1/ 2 ⎛ s 2p s 2p ⎞ ⎜ + ⎟ ⎜n n ⎟ 2 ⎠ ⎝ 1 . n − 1 df s12 .CFA Level II 公式 QUANTITATIVE METHODS Hypothesis Testing ·Type I error Rejecting H 0 when true ·Type II error Failing to reject H 0 when false ·a=probability of Type 1 error Test Population Means z= x − µ0 x − µ0 . n2 − 1 df s12 > s 22 s 22 6 .

2) s1 × s2 Test H 0 :ρ=0: t − stat = r n−2 1− r 2 . n − 2 df Multiple Regression Yi = bo + (b1 × X li ) + (b2 × X 2i ) + (b3 × X 3i ) + ε i ·Test statistical significance of b:Ho:b=0 t = bˆ / sbˆ . r Measure of strength of linear relationship (correlation ) between two variables r1.% of variability of Y explained by X’s . Detectif F-test significant t-tests insignificant 7 . 2 = cov(1. n − k − 1 df ( ·Confidence Interval: bˆ j ± t c × sbˆj ) ·SST=SSR+SSE ·MSR=SSR/k ·MSE=SSE/(n-k-1) ·Test statistical significance of regression F=MSR/MSE with k and n-k-1 df(1-tailed ) ·Standard error of the estimate (SEE=MSE ) smaller SEE means better fit ·Coefficient of determination(R2=SSR/SST).higher R2 means better fit Regression Analysis Problems ·Heteroskedasticity: Non-constant error variance Detect with Breusch-Paen test ·Autocorrelation: Correlation among error terms Detect with Durbin Watson test positive autocorrelation if DW< d1 ·Multicollinearity: High correlation among X’s.CFA Level II 公式 Correlation Coefficient.

Sin FC / DC s0 1 + iDC International Fisher Relation Assumes real interest rates are equal across borders so interest differential equals inflation differential 8 .k.a technological progress ) (Percapita economic output growth)=( capital share)×(capital-labor ratio growth )+(growth of total factor productivity ) Neoclassical Growth Theory z Assumes diminishing marginal product of capital (MPC) and curved savings function Predicts that an increase in savings rate will „ Increase the level of per capita output „ Not change long-run growth in total output which equals population growth in long-run „ Not change growth rate in per capita output withch equals technological progress in long-run Endogenous Growth Theory z Assumes constant MPC to society and a straight line savings curve but diminishing MPC to individual firms „ Predicts that an increase in savings rate will increase long run growth in per capita output Factors Promoting Economic Growth z High savings/capital investment z Human capital development z Balanced budgets tight monetary policy z Free trade z Adequate legal system z Low population growth z Technological advancement and sharing Purchasing Power Parity Law of one price a single clearly comparable good should have same real price in all countries Relative PPP Countries with high inflation rates should see their currencies depredate s1 1 + iFC = .CFA Level II 公式 ECONOMICS Growth Accounting Equation Total economic output growth=(labor share ×labor input growth)+(growth of total factor productivity ) (a.

S _ in FC / DC = s0 1 + rDC %∆S ≈ rFC − rDC Interest Rate Parity Countries with high minimal interest rates will have their currencies sell at forward discount to prevent arbitrage F 1 + rFC = . DC depreciates from initial level PPP level. Sand F in FC / DC S 0 1 + rDC F − S0 ≈ rFC − rDC S0 Asset Market Approach Money supply increase will cause: z Short-run DC depreciation form inflation Increase and rate decrease.CFA Level II 公式 1 + rFC 1 + E (iFC ) = 1 + rDC 1 + E (iDC ) rFC − rDC ≈ E (iFC ) − E (iDC ) Uncovered interest Rate Parity Countries with high minimal interest rates should see their currencies depreciate E ( s1 ) 1 + rFC . S in DC/FC ⎠ 9 . z Long-run DC appreciation to PPP level. z Overall. Currency Arbitrage 2-currency arbitrage bid-ask midpoint range = 1 ⎛⎜ 1 1 ⎞⎟ ± − 2 S f ⎜⎝ S f (1 − TC ) S f ⎟⎠ ·Triangular arbitrage opportunity if : ⎛ FC1 ⎞ ⎜ ⎟ ⎝ DC ⎠bid ⎛ DC ⎞ ⎟⎟ × ⎜⎜ FC 2 ⎠ bid ⎝ ⎛ FC2 ⎞ ⎟⎟ ≠ 1 × ⎜⎜ FC 1 ⎠ bid ⎝ Real Exchange Rate Risk Real exchange rate (X) is: ⎛P X = S × ⎜⎜ FC ⎝ PDC ⎞ ⎟⎟ .

·Traditional model predicts domestic currency depreciation will improve competitiveness and increase equity prices (negative currency exposure). S in DC/FC International CAPM DC return =FC interest rate +FC appreciation = DC interest rate + FCRP. Foreign Currency Risk Premium (FCRP) Expected foreign currency appreciation less interest rate differential: FCRP = E (%∆S ) − (rDC − rFC ) . economic profit = 0.CFA Level II 公式 Real exchange rate is possibility of nominal exchange rate changes not explained by inflation differentials. decreased LR economic activity causes currency depreciation and lower equity prices. Product Life Cycle Development Expansion Maturity Decline Regression to Mean Industry competition drives margins to long-run normal level. ·Money demand model predicts positive currency exposure. 10 . E ( R ) = RF + ( β G × MRPG ) + (γ 1 × FCRP1 ) + (γ 2 × FCRP2 ) γ = γ FC + 1 Currency Exposure ·Exporters are hurt ad importers are helped by domestic currency appreciation.

market ) var(market ) ·Unsystematic risk can be diversified away 11 . Unsystematic Risk ·Systematic risk cannot be diversified away .relevant risk for security measured with beta βi = cov(stock .CFA Level II 公式 PORTFOLIO MANAGEMENT Measuring Risk From expectation data N { } variance= σ 2 = ∑ [ri − E(r)] × Pi i=1 2 s tan dard deviation = σ = σ 2 Portfolio Risk and Return · E (rp ) = wa E (ra ) + Wb E (rb ) 2 · σ ab = ( wa2σ a2 ) + ( wb2σ b2 ) + (2wa wb pa,bσ aσ b ) ·The lower the correlation the greater the benefits of diversification Efficient Frontier and Optimal Portfolio ·Efficient portfolios have highest return for given level of risk or lowest risk for given level of return ·Optimal portfolio is intersection of efficient frontier with I curves E(RP) Risk σP Systematic Risk vs.

CML · Risk measure for CML is total risk only market portfolio and risk-free asset plot on CML ·Risk measure for SML is beta all properly priced securities and portfolios plot on SML Arbitrage Pricing Theory(APT) Main advantage over CAPM is that APT requires fewer assumptions to derive APT may be a more general model Specifically APT does not require the following (historic ) assumptions that are requited by CAPM ·Investors have quadratic utility functions ·Security returns are normally distributed ·All investors hold market portfolio Testing CAPM ·security betas are unstable portfolio betas are stable ·Roll’s Critique CAPM not testable because cannot observe market portfolio ·Benchmark error problem cannot identify market portfolio empirical SML is too flat 12 .CFA Level II 公式 Capital Market Line(CML) E (rM ) − rf ⎫ ⎧ E (rp ) = rf + ⎨σ p × ⎬ σM ⎩ ⎭ Capital market line E(RP) Efficient Frontier Market Portfolio Risk σP SML and CAPM E (ri ) = rf + {β i × [ E (rm ) − r f ]} Security market line E(RP) E(RM) Market Portfolio Rf Risk σP 1 SML vs.

CFA Level II 公式 Multifactor Models Macroeconomic factors Unexpected changes in inflation real GDP consumer confidence yield curve Microeconomic factors (Fama-French model ) Excess market returns large-cap minus small cap returns value ninus growth returns stock return momentum Portfolio management Planning Process z Analyze risk constraints liquidity time horizon legal and regulatory taxes unique circumstances z Develop IPS client description purpose duties objectives and constraints performance review schedule modification policy rebalancing guidelines z Determine investment strategy passive active semi-active z Select strategic asset allocation asset class weightings based on capital market expectations 13 .

NWC↓)→so determine the relevant ratios. Off-Balance Sheet Debt z Sale of A/R with recourse and take-or-pay contracts „ parent assets↑. ROE↑. Sales-type (capital) lease:. ROA↑. inventory balances↓. Lease is capital lease to lessor if all hold: z If lessee regards the lease as Capital Lease z Predictable collectability of the A/R. Direct financing :. NWC↑)→so determine the relevant ratios. ROA↑ .CFA Level II 公式 FINANCIAL STATEMENT ANALYSIS Inventory Analysis z INVEND=INVBGN + Pur-COGS z IF Price↑ „ LIFO →COGS↑,others↓(taxes↓. net income↑. and ROE↓. ROE ↑. z Cost can be determnined. z PV of payments > 90% of FV. ROA↓. increases today’s debt/equity „ future depreciation expense↓. and asset turnover↑. „ FIFO →COGS↓,others↑(taxes↑. shareholders’ equity↓. inventory balances↑. 14 . FIFO COGs LIFO COGS Depreciation and Impairment z accelerated → SL depreciation: depreciation↓,future net income↑. z Asset Impairment Obligation (AIO) : „ today’s assets↓. debt/equity↓. liabilities↑. net income↓. net income↓. Lease Classification Lease is capital lease to lessee if one holds: z Title is transferred to lessee at end z Bargain purchase option z Lease period ≥ 75% of asset’s life. future net income↑.

S –expense immediately. later profits. IASB – capitalize and amortize. significant influence. dividends. realized gains/losses. I/S: interest. earlier profits. same total CF. z Goodwill „ U.S.CFA Level II 公式 Effect of Classification on Lessor z Sales-type „ lessor is equipment dealer „ Will report profits and has higher assets at the beginning. z Prior results disclosed. z Equity „ 20% ≤Equity ratio≤ 50%. CFO↓(Because of Less interest revenue). z B/S values consolidated at historical cost. 15 . realized gains/losses. no change in assets at the beginning. z Prior operating results restated. and more CFO↑(Because of More interest revenue) Marketable Securities Classification z Held to-maturity „ B/S: Cost . realized and unrealized gains/losses Account for Inter-corporate Investments z Cost/market „ Equity ratio <20%. dividends z Trading „ B/S: FMV. z Acquired firm B/S restated to FMV. Under IASB and U. I/S : interest. z In-process R&D „ U. unrealized gains/losses. realized gains/losses z Available for sale „ B/S: FMV. GAAP purchase methods: z Acquirer and acquired identified. IASB – annual amortization.annual impairment test. Business Combinations Under IASB GAAP pooling method: z No identification of acquirer and acquired. I/S: interest. same total CF. Purchase Method: Constructing Consolidated Statements z Revalue all tangible assets/liability of acquired to FMV. not restated. no influence. z Consolidation „ Equity ratio >50%.S. control. z Direct Financing „ if the lessor is not the equipment dealer „ Will reports no profits.

unrecognized prior transfer obligation (asset ) +/. interest cost. z Lower healthcare cost inflation rate: „ ↓decrease APBO & post-retirement benefit expense.other factors . pension expense.amortization of actuarial losses/gains = net pension asset (liability) Pension Adjustments z Adjust pension liability/asset to reflect funded status. z Lower compensation growth rate: „ ↓PBO. z Higher expected return „ ↓pension expense. „ ↑funded status. ABO. Allocate remaining purchase price to goodwill (net of assumed liabilities). Pension Calculations FV of plan assets (beginning) + actual ROA + contributions +/. replace with MV of shares issued.actuarial losses/gains and amendments +/.benefits paid PBOt Funded status = FV of plan assets – PBO funded status +/. service cost. Eliminate common equity of acquired firm. interest cost.unrecognized actuarial losses (gains) + unrecognized prior service cost +/.other factors benefits paid = FV of plan assets (ending) PBOt-1 + service cost + interest cost +/. „ ↑ funded status. Effect of Pension Plan Assumptions z Higher discount rate: „ ↓PBO. service cost. z Recurring cost = Service cost + Interest cost z Gross pension cost = Recurring cost + actuarial losses + Plan amendments z Non-smoothed cost (credit) = Gross pension cost – Actual ROA 16 . pension expense.CFA Level II 公式 z z z Recognize intangible assets/liabilities of acquired firm.

17 . „ I/S : average rate. „ B/S non-monetary assets/liabilities: historical rate.. „ COGS& depreciation: historical rate. „ common stock: historical rate . „ Local currency → Reporting currency „ Functional currency → Reporting currency „ sub in inflationary environment. z Receivables turnover = sales / average accounts receivable z Average collection period = 365/ receivables turnover. Cash Flow Measures z Traditional cash flow = net income + depreciation + change in deferred taxes. z Payables turnover = COGS / average trade payables.inventory) / current liabilities. z Payables payment period = 365 / payables turnover. Evaluating operating efficiency: z Total asset turnover = sales / average total assets. z Quick ratio = (current assets . SG&A : average rate. Basic and Diluted EPS NI − Pr ef div Basic EPS= WA common sharesO / S Diluted EPS= Adj NI available for common shares WA common shares + potential connom shares O/S Most Critical Ratios Internal liquidity: z Current ratio = current assets / current liabilities. parent currency is functional currency. z z Temporal method. „ I/S sales. z Cash flow from operations (CFO) = traditional cash flow net changes in non-cash current assets and liabilities. z Inventory turnover = COGS / average inventory.CFA Level II 公式 Multinational Operations z All-current method: condition „ Local currency → functional currency z Method „ assets/liabilities: current rate. Method „ B/S monetary assets/liabilities: current rate.

Net profit margin =net income / sales. Return on total equity (ROE) = net income / average total equity. RR=Retention Ratio.” z Interest coverage = EBIT / interest expense. Gross profit margin = gross profit / sales. 18 . Operating profit margin = EBIT / sales. z Long – term debt to total capital = long –term debt / long –term capital. Return on total assets (ROA) = net income/ average total assets.CFA Level II 公式 z z z z z z Fixed asset turnover = sales / average fixed assets. 3-component DuPont: ⎛ netincome ⎞ ⎛ sales ⎞ ⎛ assets ⎞ ⎟⎟ ROE = ⎜ ⎟×⎜ ⎟ × ⎜⎜ ⎝ sales ⎠ ⎝ assets ⎠ ⎝ equity ⎠ 5-component DuPont: ⎛ assets ⎞ ⎡⎛ EBIT ⎞ ⎛ sales ⎞ ⎛ int erest exp ense ⎞ ⎟⎟ × (1 − t ) ROE = ⎢⎜ ⎟ ×⎜ ⎟−⎜ ⎟ ] × ⎜⎜ assets ⎠ ⎣⎝ sales ⎠ ⎝ assets ⎠ ⎝ ⎝ equity ⎠ Sustainable Growth Rate g = ROE×RR. z Debt to assets = total debt / total assets. Note: long – term capital = long – term debt+ preferred stock + equity. Note: also called “debt to total capital. Evaluate business and financial risk: z Debt-equity ratio = total long –term debt/ total equity.

fixed cost tradeoff.CFA Level II 公式 CORPORATE FINANCE Weighted Average Cost of Capital WACC = (wd)[kd(1-t)]+(wps)(kps)+(wce)(ks). z Terminal cash flows: „ after-tax salvage „ return of NWC „ Operating cash flows at the last period Operating Leverage Variable vs. DOL = (△EBIT/EBIT) / (△Q/Q) DOLQ=Q(P-V) / [Q(P-V)-F] DOLS= (S-VC)/ (S-VC-F) Financial Leverage Use of fixed – incomes in capital structure DFL =(△EPS /EPS) / (△EBIT/EBIT) DFL = EBIT / [EBIT – I] Total Leverage DTL = DOL×DFL=(△EPS /EPS) / (△Q/Q) Optimal Capital Structure Trade–off between tax shelter benefit from more debt and higher expected bankruptcy costs from higher leverage. 19 . Capital Budgeting Expansion Project z Initial investment : Cost . D is Depreciation. Good Reasons for Mergers z Economies of scale. z Complementary resources. z Vertical integration. z Surplus cash. dividend increase is good news. changes in NWC z Operating cash flows = (R-C) (1-t)+(D×t). z Eliminating operating inefficiencies. Dividend Signaling Hypothesis Unexpected dividend cut is bad news. weighted by the market value. Bad Reasons for Mergers z Diversification. z Lower financing costs.

z Fair price amendment z Restricted voting rights z Waiting period. z Poison pill z Litigation. z Supermajority. 20 . z Asset or liability restructuring .CFA Level II 公式 z Bootstrapping NPV of Merger NPV (cash merger)=gain – cost =VBT-(cash price – VT) Cost of stock merger = (N*PBT)-VT Takeover Defense Measures z Staggered boards.

CFA Level II 公式 EQUITY INVESTMENTS Alpha ex ante α = expected return – required return from CAPM or APT ex post α = holding period return . income. z Country risk is one. higher retention ratio implies higher GF. Inflation Effects on Valuation Higher flow-through rate implies higher P/ E. If inflation flow-through <100%. P0 1 = . all else equal. agency trades.return on similar assets. firm has sustainable competitive advantage. futures contract. Internal / external crossing.sided. Disadvantage: Do not eliminate inherent currency / economic risks. higher franchise P/E. k is the required rate of return. Franchise Value and Growth Process Tangible P/E =1/r Franchise P/E = franchise factor ╳ growth factor = FF×G 1 1 FF = − r ROE G= g r−g IF ROE>r. If FF>0. all else equal. Methods to Reduce Execution Costs Program trading. Valuation in Emerging Markets Adjust cash flows rather than discount rate: z Country risks are diversifiable. American Depository Receipts (ADRs) Advantage: Reduce administration / duty costs on each transaction. I is the inflation rate. z Differing response to country risk. Principal trades. z ID cash flow aids in risk management. Franchise Factor>0. higher inflation implies lower P/E. λis the E1 k + (1 − λ ) × I inflation flow-through rate. 21 . capital gain. Taxes and International Investing Three forms of tax: transaction.

22 . fixed costs. Entry barriers(or threat of new entrants) z function of economies of scale. importance of volume to supplier. Bargaining power of suppliers z determined by differentiation of inputs. Use free cash flow (FCF) models when: z Firm lacks stable dividend policy. z Minority shareholder perspective. z Dividend policy not related to earnings. threat of forward integration. z FCF is related to profitability. cost advantages. z Cost focus „ Cost leader in industry segment. value added. „ Try to set products apart from competitor’s products. „ Differentiate in industry segment. 3. Threat of substitutes z function of relative price performance of substitutes. access to distribution channels. diversity of competitors. presence of substitute inputs. demography. brand identity. Discounted Cash Flow (DCF) Methods Use dividend discount models (DDM) when: z Firm has dividend history. 2. z Dividend policy related to earnings. government policy. 5. Bargaining power of buyers z function of bargaining leverage / price sensitivity. social change. supplier concentration. Rivalry among existing competitors: z function of industry growth. brand identity. switching cost. government. Generic Competitive Strategies z Cost leadership „ Try to be low. buyer propensity to substitute.cost producer.CFA Level II 公式 Porter’s Five Forces 1. z Differentiation focus. product differentials. Industry Analysis z Industry life cycle: Pioneer Growth Mature Decline z External factors: Technology. exit barriers. foreign influences. z Differentiation. product differences. capital requirements. informational complexity. 4.

Limitations are: z Very sensitive to estimates of r and g. z Difficult with non-dividend stocks. Three ways to determine cost of equity: z CAPM: r=rf+ß(rm-rf). Present Value of Growth Opportunities E Vo = 1 + PVGO r Two – Stage Growth Model Step 1: Calculate dividends in high-growth period. solving for return yields: r= D1 +g P0 Strengths of multistage growth models: z Flexibility. z Use in forward or reverse. H-Model Vo = H= [D0 × (1 + g L )] + [D0 × H ( g s − g L )] r − gL t 2 Solving for Required Return For Gordon (or stable growth) model. Use residual income (RI) when: z Firm lacks dividend history. z Add equity risk premium to firm’s LT bond yield. Step 2: Use GGM for terminal value at end of high-growth period. Step 3: Discount interim dividends and terminal value to time zero to find stock value. Gordon Growth Model (GGM) Assumes perpetual dividend growth rate V0 = D1 r−g Most appropriate for mature.CFA Level II 公式 z Controlling shareholder perspective. stable firms. z Difficult with unpredictable growth patterns (use multi-stage model). z Relationship between assumptions and value estimates. 23 . z Multi–factor APT. z FCF is negative.

z FCFE = NI-[(1-DR)×(FCInv-Dep)]-[(1-DR)×WCInv]. z FCFF = [EBIT]×(1-tax rate)]+Dep-FCInv – WCInv. Free Cash Flow to Eqauity (FCFE) z FCFE = FCFF – [Int×(1-tax rate)]+Net borrowing.CFA Level II 公式 z Easy with spreadsheet software. Step 2: Use single-stage FCF model for terminal value at end of high-growth period. r for FCFE. use WACC for FCFF. z Difficult to ID data / input errors. z FCFE = NI + Dep – FCInv-WCInv+Net borrowing. Free Cash Flow to Firm (FCFF) Assuming DEPreciation is only NCC: z FCFF= NI+Dep+[Int×(1-tax rate)]-FCInv-WCInv. Price to Earnings (P/E) Ratio Problems with P/E. transitory portion of earnings makes interpretation difficult. z Management discretion over accounting choices affects reported earnings. Step 3: Discount interim FCF and terminal value to time zero to find stock value. z If earnings <0. z FCFF = [EBITDA×(1-tax rate)]+(Dep×tax rate)-FCInv-WCInv. garbage-out. Limitations of multistage models: z Garbage-in. z Volatile. z Value estimates sensitive to assumptions of growth and required return. z Can’t determine effects of assumptions unless model is clearly understood. P/E meaningless. z FCFF = CFO + [Int×(1-tax rate)]-FCInv. Justified P/E Leading P / E1 = 1− b r−g 24 . z Single-Stage FCFF / FCFE Models z For FCFF valuation: Vo = FCFF1 WACC − g z For FCFF valuation: Vo = FCFF1 r−g Two – Stage FCFF / FCFF Models Step 1: Calculate FCF in high-growth period.

z BV more stable than EPS. Disadvantages: z Size differences cause misleading comparisons. Justified P / S = PM 0 × (1 − b)(1 + g ) r−g Price to Cash Flow Ratios Advantages: z Cash flow harder to manipulate than EPS. z Measures NAV of financial institutions. 25 .CFA Level II 公式 Trailing P / E0 = (1 − b)(1 + g ) r−g Normalization Methods: z Historical average EPS. z Not as volatile as P/E ratios. Disadvantages: z Difficult to estimate true CFO z FCFE better but more volatile. z Useful in valuing mature. Disadvantages: z High sales do not imply high profits and cash flows. z Revenue recognition practices still distort sales. z Does not capture cost structure differences. z Sales revenue not easily manipulated. z Influenced by accounting choices. Justified = P / B = ROE − g r−g Price to Sales (P/S) Ratio Advantages: z Meaningful even for distressed firms. z Average ROE. and start-up firms. z BV≠MV due to inflation/ technology. z More stable than P/E z Mitigates earnings quality concerns. Price to Book (P/B) Ratio Advantages: z BV almost always>0. cyclical.

$WACC. Growth Duration Model ⎛1 + gH + dH ⎞ ⎛ High. z Single-stage residual income model: V0 = B0 + z PV of continuous residual income in T-1: ROE − r × B0 r−g RI T . 1+ r − ω between 0 and 1. z Fundamentals that affect multiple should be similar between firm and benchmark. Invested capital = NWC + Net PP&E Ways to increase EVA : Increase revenues. ω is the persistence factor. Residual Income (RI)Valuation z RIt=Et-(r×Bt-1) z Firm value = adjusted BV0+ PV of expected future RI. NOPAT = EBIT(1-t) $WACC = WACC×Invested capital. P / E ⎞ ⎟⎟ ln⎜ ⎟ = T × ln⎜⎜ ⎝ Cons tan tGrowthP / E ⎠ ⎝ 1 + gC + dC ⎠ 26 . find + NPV projects. reduce WACC.CFA Level II 公式 Method of Comparables z Firm multiple > benchmark implies overvalued z Firm multiple < benchmark implies undervalued. less invested capital . reduce expenses. Growh. Economic Value Added EVA = NOPAT .

ability to pay. Callable bond exhibits negative convexity. short-term. floating bank debt. SPV) Municipal bonds z Tax-backed: repaid with tax revenue z Revenue: repaid with project CF. price price Strike price yield yield 27 . Bond Price Yield Relationship Option free bond exhibits positive convexity. z Economic risk. Asset-backed debt z Quality of collateral. foreign currency rating.CFA Level II 公式 DEBT INVESTMENTS Credit Analysis Liquidity sources z Working capital z Cash flow. z Political risk: willingness to pay. z Servicer quality z Payment structure. High-yield debt z Issuer has senior. z Back-up facilities z Third-party guarantees. Sovereign debt z Local vs. z Legal structure (VIE.

spot rates constant z Liquidity theory „ F rates reflect expectation of E(S) plus liquidity premium z Preferred habitat theory „ Imbalance between fund supply demand at maturity range induces lenders to shift from preferred habitats to one with opposite imbalance z Market segmentation theory „ Imbalance between fund supply demand at maturity range induces lenders to shift from preferred habitats to one with opposite imbalance z Market segmentation theory „ Yield curve shape determined by supply demand for securities at each maturity Key Rate Duration ·% △value from 100 bps △in key rate ·Have several key rates (5-yr.CFA Level II 公式 Duration and Convexity ED = (BV−∆Y − BV+∆Y ) 2 × BVO × ∆Y %△BV (from duration)≈-ED×△y Convx = BV− ∆y − BV+ ∆y − (2 × BVo ) 2 × BVo × ∆y 2 %△BV (from convx)≈Convx×△y 2 Yield Curve(Term Structure ) Shifts ·Parallel shift ·Nonparallel shift slope changes ·Butterfly twist change in “humped ” shape Theories of the Term Structure z Pure (unbiased) expectations Forward rates (F) function of expected future spot rates E(S) „ If up sloping. spot rates fall „ If flat. spot rates rise „ If down sloping . 10-yr ) ·Estimate effect of non-parallel yield curve shift on bond portfolio value Valuing Option Free Bonds To value option free bond with the binomial tree start at end and discount back though the tree (backwards induction method ) Value 2-year option free bond step1: Find the time one up node value 28 .

U ⎢⎜ 2 ⎣⎜⎝ 1 + i0 ⎞ ⎛ nodal _ value1.” ·Compensation for liquidity and credit risk ·Spread that forces model price =marker price ·z-spread =OAS+option cost Convertible Bonds ·Conversion value =stucco price x conversion ratio ·Minimum value =min(straight value conversion value ) ·Market conversion premium=conversion price market price ·Callable convertible bond=straight bond . DD ⎢ 2 ⎣⎢⎜⎝ 1 + i1.U ⎞ ⎛ nodal _ value2UD ⎟+⎜ ⎟ ⎜ 1 + i1.D ⎞⎤ ⎟⎟ + ⎜⎜ ⎟⎟⎥ + 1 i 0 ⎠ ⎝ ⎠⎦ Call=noncallable bond –callable bond Option Adjusted Spread ·“Option-removed spread. D ⎠ ⎝ ⎞⎤ ⎟⎥ ⎟ ⎠⎦⎥ Step 3: Find time zero value : nodal value 0 = 1 ⎡⎛ nodal _ value1.D = 1 ⎡⎛⎜ nodalvalue2.UD ⎟+⎜ ⎟ ⎜ 1 + i1.U ⎠ ⎝ ⎞⎤ ⎟⎥ ⎟ ⎠⎥⎦ Step 2 Find time one down-node value nodal value 1. „ Mortgage rate path (refinancing burnout ) „ Level of mortgage rates „ Underlying mortgage rates „ Seasonal factors z Contraction risk occurs as rates fall prepayments rise average life falls z Extension risk occurs as rates rise prepayments fall slow average life rises 29 .U = 1 ⎡⎛⎜ nodal _ value2UU ⎢ 2 ⎢⎣⎜⎝ 1 + i1. D ⎞⎤ ⎟⎟ + ⎜⎜ ⎟⎟⎥ 1 + i0 ⎠ ⎝ ⎠⎦ Value Bond with Embedded Option For bonds with embedded options assess whether option will be exercised at each node New Step 3 is Step 3 (callable bond ) Find time 0 value assuming year 1 down node calculated value> than call price nodal value 0 = 1 ⎡⎛ nodal _ value1.CFA Level II 公式 Nodal value 1. D ⎞ ⎛ nodalvalue2.U ⎢⎜ 2 ⎣⎜⎝ 1 + i0 ⎞ ⎛ nodalvalue1.call on stock call on bond MBS Prepayment Risk z Prepayment speed factors „ Spread of current vs original mortgage rates.

CFA Level II 公式 CMO prepayment Risk z PAC I tranches: low contraction and extension risk (due to PAC collar) z PAC II tranches: somewhat higher contraction and extension risk z Support tranches: higher contraction and extension risk z IO strips: value positively related to interest rates at low current rates z PO strips: negative convexity at low rates high interest rate sensitivity ABS Prepayment Risk z External credit enhancement corporate guarantees leers of credit bond insurance z Internal credit enhancement reserve funds over-collateralization senior sub structure z Auto loan low prepayment risk small balances high depreciation z Credit card receivable low prepayment (lockout period no prepayments on crddit cards ) MBS /ABS spread Analysis z Plain vanilla corporate: Z-spread z Callable corporate: OAS (binomial model ) z MBS: OAS (Monte Carlo model ) z Credit card auto ABS: Z-spread z High quality home equity ABS: OAS (Monte Carlo model ) 30 .

k ) = ⎢ ⎟ ⎢ 1 + L( j ) ( j ) ⎥⎝ k ⎠ 360 ⎣ ⎦ Currency Forward(Interest Rate Parity ) FP (currency ) = S 0 T ( 1 + Rdomestic ) × (1 + R foreign ) T F and S in DC/FC Vlong = St (1 + R foreign ) T −t - FP (1 + Rdomestic )T −t Futures Price FP = S 0 × (1 + R f ) T ·Futures> forward when rates and asset values positively correlated ·Futures< forward when rates and asset values negatively correlated 31 .CFA Level II 公式 DERIVATIVES Forwards-No Arbitrage Pricing FP = S 0 × (1 + R f ) T Vlong = S t − FP (1 + R f )T −t Equity Forward FP (equity ) = ( S 0 − PVD ) × (1 + R f )T Vlong = S t − PVDt − FP (1 + R f )T −t Forward on Fixed Income securities FP ( fixedincome) = ( S 0 − PVD ) × (1 + R f )T Vlong = S t − PVC − FP (1 + R f )T −t Forward Rate Agreements ·Long position in FRA is party that would borrow If LIBOR at end is above forward rate in FRA long in effect has right to borrow at below market rates and receives a payment ·FRA“Price”is forward rate implied by current sport rates j+k ⎤ ⎡ ⎢1 + L(1+ k ) 360 ⎥⎛ 360 ⎞ − 1⎥⎜ FR ( j .

5 × σ 2 ) × (T − t ) X d1 = ⎝ ⎠ σ × T −t d 2 = d1 − (σ × T − t ) Pt = Ct − St + (e − r (T −t ) × X ) Effect of each variable on a call option Asset price positively related 32 . buy asset under futures contract. repay loan at end Reverse cash and carry: short spot. buy futures today. collect loan. sell futures today deliver asset. Treasury Bond Futures FP = bond price × (1 + R f )T − FVC Equity Futures FP( stock ) = S 0 × (1 + R f ) T − FVD FP(index) = S 0 × e ( R −δ )T Put-Call Parity Call+Risk-free Bond=Put+Underlying Co + X = P0 + S 0 (1 + r )T Caps and Floors ·Cap=portfolio of calls on LIBOR ·Floor=portfolio of puts on LIBOR ·Collar=buy cap and sell floor or sell cap and buy floor Binomial option Pricing Model Step 1: Calculate option payoffs at end in all stares Step 2:Calculate expected value using probabilities 1+ R − D U −D Step 3: Discount to today at risk –free rate π up = Black-Scholes Option Pricing Model Ct = [ S t × N (d1 )] − [ X × e − r (T −t ) × N (d )] [ ] ⎛S ⎞ ln⎜ t ⎟ + r + (0. deliver to cover short sale . buy spot.CFA Level II 公式 Futures Arbitrage Cash and carry: Borrow. invest.

CFA Level II 公式 z z z z z Asset price: positively related Volatility of asset price: positively related Risk free rate: positively related Time to expiration: positively related Exercise price: Negatively related Delta Estimates the change in value of option for a one-unit change in stock price ·Call delta between o and 1 increases as stock price increases · Call delta close to 0for far out of the money calls close to 1 for fan in the money calls ·Put delta between I and 0 increases from 1 to 0 as stock price increases ·Put delta =call delta -1 (all else equal ) ·Delta close to 0 for far out –of the money puts close to -1 for fan in the money puts Delta Neutral Hedging #Calls for delta hedge = # shares of stock delta of call option Delta neutral position only holds for very small changes in value of underlying stock Delta neutral portfolio must be frequently (continuously) rebalanced to maintain hedge called a dynamic hedge Gamma Measures rate of change in delta as underlying stock price changes largest when option is at the money Currency Swaps Parties swap payments in two currencies at fixed or floating rates Interest Rate Swaps Plain vanilla interest rate swap trading fixed interest rate payments for floating rate payments Equity Swaps Return on stock portfolio or stock index is paid each period by one party in return for a fixed payment Return can be capital appreciation or total return including dividends on the stock or portfolio Swap Pricing and Valuation ·Swap rate is set so PV of floating rate payments PV of fixed rte payments swap value is zero to both parties CN = 1 − BN B1 + B2 + L + BN 33 .

CFA Level II 公式 Bn = PV of $1 on n th date ·Value to fixed pay side =PV of floating –PV of fixed ·Value to floating –pay side=PV of fixed –PV of floating Swptions ·Payer swaption value increases as rates rise ·Receiver swaption value increases as rates fall 34 .

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