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2008 CFA Program: Level I Errata

5 February 2008

To be fair to all candidates, CFA Institute does not respond directly to individual candidate
inquiries. If you have a question concerning CFA Program content, please contact CFA Institute
( to have potential errata investigated. Corrections below are in bold and
new corrections will be shown in red.
Some of the accounting concepts in the Financial Statement Analysis study sessions
may be superseded by updated rulings and/or pronouncements issued after a reading was
published. Candidates are expected to be familiar with the overall analytical framework
contained in the study session readings, as well as the implications for alternative accounting
methods, as provided in the assigned readings. Candidates are not responsible for accounting
changes that occur after the material was written.
Prior to January 2001, accounting and financial reporting standards issued by the
International Accounting Standards Board (IASB) carried the name International Accounting
Standard (IAS) before their number. Since that date, standards carry the International Financial
Reporting Standards (IFRS) prefix. The CFA examination has adopted the IASB’s official
language. The term International Financial Reporting Standards used on the CFA examination
includes all standards issued by the IASB including those with both the IAS and IFRS prefixes.

• Study Session 2, Reading 7:

o On. pp. 288-289, in Steps ii and iii, observations that are equal to the mean should be
included rather than discarded. In Step iv, the second sentence should read: “A formula
for semivariance approximating the unbiased estimator is:” The formula should have a
divisor of n – 1 (instead of n* – 1) and be for Xi ≤ X . With a divisor of 4, semivariance is
then 159.0553; semideviation is 12.6 percent, which is less than standard deviation
which overstates risk. Parallel changes are made in the formula for target semivariance.
Target semivariance is then 293.675 and target semideviation is 17.14 percent.
o In the solutions to problem 9-E and -F (p. A-35), semivariance equals 4,425.2490/(10 –
1) = 491.6943 and semideviation equals 491.6943 = 22.174 or 22.17%.
• Study Session 3, Reading 10: In the discussion of Figure 1 on pp. 437–8, ignore the
assertions concerning “peaked” and “degree of peakedness;” the assertions concerning
the fatness of tails are not affected. In the solution to 8.A (p. A-55), the last sentence should
read: “The sample standard deviation is s ...” (instead of s2).
• Study Session 3, Reading 12: At the bottom of p. 507, in the last full paragraph, “... some
technicians may place a buy stop order ...” (instead of a “limit” order).
• Study Session 4, Reading 13: In problem 7 (p. 34), the quantity demanded declines from 30
units to 28 units (instead of 18). The solution on p. A-2 is correct as given, except the first
equal sign should instead be a plus sign: 2/[30 + 28)/2] = 2/29.
• Study Session 5, Reading 22: On p. 303, in the discussion and calculation of CPI, the years in
question should be 2003 and 2004 (instead of 2000 and 2001).
• Study Session 5, Reading 23: On p. 314, the last sentence of the second paragraph should
read “For example, ... if the price level is 95, the quantity of real GDP supplied is $9 trillion”
(instead of 100).
• Study Session 7, Reading 30: In the second table on p. 55, “Total Assets” should sum to
$160,600. The individual numbers are correct; the typo appears in the sum.
• Study Session 8, Reading 32: On p. 185, in the middle of the second paragraph under Section
8, the sentence should read “Assume, for example, a company’s beginning shareholders’
equity is €110 million ...” (instead of €100 million).
• Study Session 8, Reading 34: LOS 34(g) should be changed to read: describe the process of
converting a statement of cash flows from the indirect to the direct method of presentation.
Also, on p. A-12, there is a typo in the solution to Problem 15. In the last line, the answer
should total $45 million rather than $25 million.
• Study Session 9, Reading 35: In the solution to problem 3.A (p. A-15), footnote ‘b’ in the
table should show the cash balance calculation as $10,000 + Cash from operations –
Dividends paid. In the solution to 4.C.i (p. A-17), the denominator in footnote ‘b’ should be
($25,200 + $5,100 + $24,900 + $3,600)/2. Despite this typo, the FIFO inventory turnover for
Zenab in 20X2 as given in the text (2.03) is correct.
• Study Session 9, Reading 40: In the solution to problem 4.C (p. A-44), in the calculation in
footnote (a), the decimal amount should be 0.06 instead of 0.6. On page A-50, in the solution
to 8G, the authors incorrectly excluded the leased asset’s residual value. For 12/31/01, Net
investment in lease, long-term should be $165,018 and for 12/31/02 it should be $161,520.
• Study Session 10, Reading 42: On p. 659, the second-to-last word in the shaded Solution to 2
should be “unadjusted” (instead of “adjusted”).
• Study Session 11, Reading 45: There were a number of typographical errors introduced in
this reading:
o In the equation at the top of p. 47, insert (1 – t) immediately following rd (should appear
as rd(1 – t) = ...).
o In Equations 45-4 (p. 50) and 45-5 (p. 51), the subscripts on beta should be sub-i
instead of sub-l. This change should also be made on the bottom of p. 72 (Summary).
o In the equation on p. 56, there should be an open space between Rmt and t= to separate
o In Equation 45-10 (p. 58), the subscripts of “asset” and “equity” should be reversed
(βequity = βasset ...)
o At the top of p. 64, in the last line of the first paragraph, change “equity risk premium” to
“cost of equity”.
o On p. 73, delete the second “equal” sign in the equation for βL,project.
• Study Session 11, Reading 47: In the third line on p. 143, the second equal sign should be a
multiplication sign (10.39% = $530/$13,565 × $461/$530 ...)
• Study Session 12, Reading 49: On p. 215, in the fifth paragraph, references should be to the
prudent investor rule instead of the prudent-man standard.
• Study Session 12, Reading 50: In the solutions on p. A-14, the calculations for standard
deviation in 1B and covariance in 1C should use (n – 1) rather than n in the denominators.
The standard deviation for Madison is thus √(0.0257/5) = 0.0715 and the standard deviation
for GE (named “Sophie Electric” in the problem) is √(0.04120/5) = 0.0908. COVij =
(1/5)(0.0222) = 0.0044.
• Study Session 12, Reading 51: There are a number of changes in this reading:
o On p. 256 immediately before Eq. 51-1, “Recall that the covariance between a sample of
two sets of returns is ...”
o In Exhibit 11 on p. 270, the figures for Average (R) and Standard Deviation should be
moved one column to the right. Also in this Exhibit, covariance should have been
calculated using (n–1) rather than n. Cov(GE,S&P) = 42.89/11 = 3.90, Cov(GE,MSCI) =
39.59/11 = 3.60. Subsequent calculations that use these numbers should be adjusted
• Study Session 13, Reading 52: There are a number of corrections for this reading:
o On p. 28, in the formulas showing the margin account return, the numerator should
include a subtraction of 200 instead of 100 for commissions. The denominators
include the 5,000 initial investment and 100 commission. For a 20% increase, the
return is thus (12,000–5,000–300–200)/(5,000 + 100) = 6,500/5,100 = 27.45%. For a
20% decline: (8,000–5,000–300–200)/(5,000 + 100) = 2,500/5,100 = –50.98%.
o On page A-2, in the solution to 1.B, an investor would not try to purchase fractional
shares in this situation and the text correctly specifies that we round the answer down
to 3,571 shares. Consequently, the investor borrows $74,985 instead of $75,000.
Therefore, the profit if the stock rises to $45/share should be $35,710. If the stock
falls to $25/share, the profit is –$35,710.
o Regarding the solution to problem 3 (p. A-3), when investors open a short position in
a stock, they must post funds in addition to the proceeds from the short sale. Cash is
not borrowed and so interest is not charged. The correct rate of return on the
investment is thus $550/$2,675 = 20.56%.
• Study Session 14, Reading 56: Candidates should study problems 2 and 3 after completing
Reading 60, which is the second half of Reading 56. In solution 2 (p. A-11) the answer is
correctly given as D, but a number of typos appear in the explanation. It should read V =
Dividend/kp = 3.30/0.06 = $55.00 (equal signs instead of plus; subscript on ‘p’; $55 instead
of $5). The solution to problem 3 incorrectly uses 6% as the dividend growth rate. Using a
5% growth rate as specified in the problem, the correct value of Lambertus equity is $78.75.
• Study Session 15, Reading 65: On p. 376, there is a typo on 17.C. The numbers should appear
as 1.45%, 30.21%, and 1.30.
• Study Session 15, Reading 66: The solution to problem 1 (p. A-44) should read A is correct.
The accompanying explanation (rate of inflation) is correct as printed.
• Study Session 16, Reading 68: On p. 435, the calculation of cash flow yield should show
minus 1 instead of plus: 2[(1.005)6 – 1] = 6.08%.
• Study Session 16, Reading 69: On p. 497, the denominator in the first term of Eq. 69-3 should
be (1 + yield/k), instead of yield>k.
• Study Session 17, Reading 70: On the 7th line of p. 18, the contract size should be “200
shares” instead of 200 options.
• Study Session 17, Reading 72: At the top of p. 59 in Example 1, the numbers should be
shifted one column to the left so they appear in the “Day” and “Futures Price” columns.
Also, delete problem 8 at the end of this reading. This problem is no longer assigned.
• Study Session 17, Reading 74:
¾ On p. 133 in the Solution to C in Example 1, the semi-annual payment should also be
paid at the end of the swap. Therefore, the final exchange of cash should be: Domestic
party pays counterparty £30,000,000 + £924,658 = £30,924,658; Counterparty pays
domestic party $50,000,000 + $1,380,222 = $51,380,222.
¾ On p. 146, delete the “CFA exam” logo from problem 10. This question was not used
on the 2005 CFA exam. Also on this problem, the final line of the question should read:
“... that Agrawal should use to evaluate the two alternatives convert the Eurodollar
borrowing to the equivalent of issuing fixed income bonds.