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  1. Asked: September 21, 2023In: Corp. Finance (CFA L1)

    cost of capital

    Ispaat Sengupta Pro
    Added an answer on September 21, 2023 at 4:57 pm

    Wang Securities increased its debt-to-equity (D/E) ratio from 0.65 to 0.75 due to recent bank borrowing. Let's examine the effects on both the asset beta and the equity beta: Asset Beta measures the risk of the company's assets without considering its capital structure. It is a reflection of the comRead more

    Wang Securities increased its debt-to-equity (D/E) ratio from 0.65 to 0.75 due to recent bank borrowing. Let’s examine the effects on both the asset beta and the equity beta:

    Asset Beta measures the risk of the company’s assets without considering its capital structure. It is a reflection of the company’s core business risk.

    Equity Beta measures the risk of the company’s equity (common stock) and takes into account the company’s capital structure, including its debt. It reflects both the core business risk (as captured by the asset beta) and the financial risk arising from the company’s leverage (debt).

    Now, let’s consider the effects:

    1. Asset Beta (B_A): Increasing the debt level (raising the D/E ratio) often increases the financial risk of the company. As a result, the asset beta, which reflects the core business risk, is likely to remain the same or decrease slightly. The reason for this is that financial risk is being shifted to the equity holders through increased leverage, which doesn’t directly impact the core business risk.
    2. Equity Beta (B_E): The equity beta takes into account both core business risk (asset beta) and financial risk due to leverage. When the D/E ratio increases, the financial risk associated with equity increases. Therefore, the equity beta is expected to rise.

    Given these considerations, option B is the most accurate:

    B. The asset beta will remain the same, and the equity beta will rise.

    Option A is incorrect because it suggests both the asset beta and the equity beta will rise, which doesn’t align with the typical relationship between debt and asset beta.

    Option C is also incorrect because it suggests that the equity beta will decline, which is unlikely when leverage increases.

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  2. Asked: September 4, 2023In: Alternative Inv (CFA L2)

    Real Estate Through Publicly Traded Sec

    Finance Pro
    Added an answer on September 21, 2023 at 4:56 pm

    The correct answer to this question depends on the specific details and circumstances of REIT B's investment in the storage subsector. Let's analyze both options: New competitive facilities (Option A): In the storage subsector, the addition of new competitive storage facilities in the vicinity can iRead more

    The correct answer to this question depends on the specific details and circumstances of REIT B’s investment in the storage subsector. Let’s analyze both options:

    1. New competitive facilities (Option A):
      • In the storage subsector, the addition of new competitive storage facilities in the vicinity can indeed adversely affect an existing storage REIT (REIT B). When new storage facilities are introduced, they can potentially take away customers or force the existing REIT to lower rental rates or offer promotions to remain competitive. This can negatively impact the REIT’s revenue and profitability.
    2. Obsolescence of existing space (Option C):
      • Obsolescence refers to the declining usefulness or relevance of a property. In the context of storage, this could mean that the storage units become outdated or less appealing to tenants due to changes in customer preferences, technological advancements, or other factors. If REIT B’s storage facilities become obsolete and are no longer in demand, it could indeed pose a significant risk to the investment.

    Given this analysis, both options A and C could be valid concerns for REIT B, depending on the specific circumstances of the storage subsector and the REIT’s properties. The correct answer may ultimately depend on the context provided in the question or the specific factors at play in REIT B’s investment in the storage subsector. Therefore, it’s essential to consider the broader context and specific details when assessing which risk factor is most likely to adversely affect the investment in REIT B.

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  3. Asked: September 21, 2023In: Fixed Income (CFA L1)

    plzz tell answer 135

    GOPAL456789 Advanced
    Added an answer on September 21, 2023 at 4:54 pm

    To estimate the price of the illiquid 5-year, 4.5% annual-pay coupon bond, you can use linear interpolation based on the yields of Bond A and Bond B, which have similar credit quality. Here's how to do it: Calculate the yield spread between Bond A and Bond B: Yield Spread = Yield of Bond B - Yield oRead more

    To estimate the price of the illiquid 5-year, 4.5% annual-pay coupon bond, you can use linear interpolation based on the yields of Bond A and Bond B, which have similar credit quality. Here’s how to do it:

    1. Calculate the yield spread between Bond A and Bond B:
      • Yield Spread = Yield of Bond B – Yield of Bond A
      • Yield of Bond A = (100 / Price of Bond A) – 1
      • Yield of Bond B = (100 / Price of Bond B) – 1
      • Yield Spread = [(100 / Price of Bond B) – 1] – [(100 / Price of Bond A) – 1]
    2. Now, apply the yield spread to the yield of Bond A to estimate the yield of the illiquid bond:
      • Yield of the illiquid bond = Yield of Bond A + Yield Spread
    3. Convert the yield of the illiquid bond back into a price:
      • Price of the illiquid bond = 100 / (1 + Yield of the illiquid bond)

    Given the information provided:

    • Price of Bond A = $101 per 100 of par value
    • Price of Bond B = $98 per 100 of par value
    • Bond A is a 3-year, 4% annual-pay bond, so its yield is approximately 3.96%
    • Bond B is a 6-year, 6% annual-pay bond, so its yield is approximately 6.12%

    Now, calculate the yield spread:

    • Yield Spread = 6.12% – 3.96% = 2.16%

    Next, estimate the yield of the illiquid bond:

    • Yield of the illiquid bond = 3.96% (Bond A’s yield) + 2.16% (Yield Spread) = 6.12%

    Finally, calculate the price of the illiquid bond:

    • Price of the illiquid bond = 100 / (1 + 6.12%) ≈ $94.7152

    So, the price of the illiquid bond per 100 of par value is closest to: B) $99.7152

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  4. Asked: September 3, 2023In: FRA (CFA L2)

    Multinational operations

    Finance Pro
    Added an answer on September 21, 2023 at 4:49 pm

    A. FIFO and its functional currency were the US dollar: The weighted-average rate when inventory was acquired is 0.654. The average rate in 2007 is 0.662. B. LIFO and its functional currency were the US dollar: The same exchange rates apply for LIFO as for FIFO since the functional currency is the URead more

    A. FIFO and its functional currency were the US dollar:

    • The weighted-average rate when inventory was acquired is 0.654.
    • The average rate in 2007 is 0.662.

    B. LIFO and its functional currency were the US dollar:

    • The same exchange rates apply for LIFO as for FIFO since the functional currency is the US dollar.

    C. FIFO and its functional currency were the Singapore dollar:

    • The weighted-average rate when inventory was acquired is 0.654.
    • The average rate in 2007 is 0.662.
    • However, the functional currency being the Singapore dollar could potentially introduce exchange rate fluctuations when converting the financial statements to the functional currency.

    Now, let’s calculate the cost of goods sold (COGS) and gross profit margin for each option:

    A. FIFO and its functional currency were the US dollar:

    • COGS = Beginning inventory * 0.654 (weighted-average rate when inventory was acquired) + Purchases during 2007 * 0.662 (average rate in 2007) – Ending inventory * 0.671 (31 December 2007 rate).
    • Gross Profit Margin = (Revenue – COGS) / Revenue.

    B. LIFO, and its functional currency were the US dollar:

    • COGS calculation would be the same as in option A since the exchange rates are the same.

    C. FIFO and its functional currency were the Singapore dollar:

    • COGS = Beginning inventory * 0.654 (weighted-average rate when inventory was acquired) + Purchases during 2007 * 0.662 (average rate in 2007) – Ending inventory * 0.671 (31 December 2007 rate), but there might be additional exchange rate conversions due to the functional currency being the Singapore dollar.
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  5. Asked: August 14, 2023In: Corp. Finance (CFA L2)

    Cost of capital and corporate restructuring notes

    GOPAL456789 Advanced
    Added an answer on September 21, 2023 at 4:42 pm

    I understand you're looking for notes on "Cost of Capital" and "Corporate Restructuring." However, I cannot provide specific notes or materials, especially if they are not publicly available or authorized for sharing. To obtain these notes, here are some steps you can take: Contact Your Instructor oRead more

    I understand you’re looking for notes on “Cost of Capital” and “Corporate Restructuring.” However, I cannot provide specific notes or materials, especially if they are not publicly available or authorized for sharing.

    To obtain these notes, here are some steps you can take:

    1. Contact Your Instructor or Professor: If you are taking a course on these topics, your instructor or professor may be able to provide additional materials or direct you to the relevant resources.
    2. Course Materials: Review any course materials or textbooks recommended for your class. These materials often contain comprehensive information on the subjects.
    3. Online Resources: Explore educational websites, forums, and blogs that cover topics related to “Cost of Capital” and “Corporate Restructuring.” Websites like Investopedia, Corporate Finance Institute, and Khan Academy offer free resources on finance and corporate topics.
    4. Library: Visit your university or local library to check if they have books, journals, or research papers related to these topics.
    5. Online Courses: Consider enrolling in online courses or programs that specialize in finance, corporate finance, or restructuring. Online learning platforms like Coursera, edX, and Udemy offer courses that cover these subjects in depth.
    6. Study Groups: Join study groups or forums where students or professionals discuss and share resources related to finance and corporate restructuring. These groups can be valuable for exchanging notes and insights.

    Remember to respect copyright and intellectual property laws when obtaining and using study materials.

    Regenerate
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    • 0
  6. Asked: September 21, 2023In: Corp. Finance (CFA L1)

    Corporate Issuers – NPV

    Ispaat Sengupta Pro
    Added an answer on September 21, 2023 at 4:40 pm

    The statement "C is correct" is indeed accurate. Let's break down the reasons why option C is the correct answer: C. The stock price could remain steady, move higher, or move lower. While Ms. Ndereba's analysis confirmed that the project has a positive NPV, there are several factors to consider: MarRead more

    The statement “C is correct” is indeed accurate. Let’s break down the reasons why option C is the correct answer:

    C. The stock price could remain steady, move higher, or move lower.

    While Ms. Ndereba’s analysis confirmed that the project has a positive NPV, there are several factors to consider:

    1. Market Sentiment: Stock prices are influenced not only by fundamental factors like NPV but also by market sentiment and investor expectations. Even if the project has a positive NPV, if investors expected an even higher NPV, they might be disappointed and sell off their shares, causing the stock price to drop.
    2. Future Developments: Future news, events, and developments can impact the stock price. Ms. Ndereba’s analysis is based on the information available at the time, but unforeseen developments, changes in oil prices, or geopolitical events can affect the company’s prospects and, subsequently, its stock price.
    3. Market Dynamics: Stock prices are determined by the supply and demand for the company’s shares. If more investors want to buy the stock (higher demand) than sell it (lower supply), the price will go up, and vice versa. This supply and demand dynamic can be influenced by a wide range of factors, not just the NPV of a project.
    4. Profit Expectations: Even if a project has a positive NPV, investors may have different profit expectations. Some investors may have anticipated an even higher NPV, leading them to buy more shares, while others may have had more conservative expectations.

    Given these factors, it’s entirely possible for the stock price to remain steady, move higher, or move lower, even after Ms. Ndereba’s analysis confirmed a positive NPV for the project. Investors’ reactions to the information and their expectations for the company’s future performance will play a significant role in determining the stock’s future price movements.

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  7. Asked: September 5, 2023In: Portf. Mgt (CFA L1)

    Technical analysis notes

    GOPAL456789 Advanced
    Added an answer on September 21, 2023 at 4:30 pm

    I'm unable to share or provide specific handwritten notes as I don't have access to external files, documents, or links, and sharing copyrighted or personally created content without permission may not be legal or ethical. If you're looking for resources on technical analysis, I recommend the followRead more

    I’m unable to share or provide specific handwritten notes as I don’t have access to external files, documents, or links, and sharing copyrighted or personally created content without permission may not be legal or ethical.

    If you’re looking for resources on technical analysis, I recommend the following:

    1. Online Courses: Many websites and platforms offer online courses on technical analysis, such as Coursera, Udemy, and Khan Academy. These courses often provide structured learning materials.
    2. Books: There are numerous books on technical analysis, written by experts in the field. Some popular options include “Technical Analysis of the Financial Markets” by John J. Murphy and “Japanese Candlestick Charting Techniques” by Steve Nison.
    3. Websites and Blogs: There are several websites and blogs dedicated to technical analysis that provide educational content, charts, and analysis. Investopedia and StockCharts.com are good places to start.
    4. Public Libraries: Your local library may have books and resources on technical analysis that you can borrow.
    5. Financial Forums: Participating in financial forums like those on Reddit or specialized trading communities can be a way to learn from others and share insights.
    6. Practice: To get the most out of your technical analysis studies, practice is essential. You can use paper trading or virtual trading platforms to practice your analysis without risking real money.

    Remember that technical analysis is just one approach to analyzing financial markets, and it has its strengths and limitations. It’s crucial to combine it with other forms of analysis and risk management strategies when making investment decisions.

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  8. Asked: August 30, 2023In: 6. CA

    Derivatives Dawn series question 5

    Ispaat Sengupta Pro
    Added an answer on September 21, 2023 at 4:27 pm

    Let's address your questions step by step: i. To determine whether the December futures were underpriced or overpriced on September 15, we can use the cost-of-carry model for futures pricing. The formula for the futures price (F) is: F = Se^(r - d) * T Where: S is the spot price (1195). e is the basRead more

    Let’s address your questions step by step:

    i. To determine whether the December futures were underpriced or overpriced on September 15, we can use the cost-of-carry model for futures pricing. The formula for the futures price (F) is:

    F = Se^(r – d) * T

    Where:

    • S is the spot price (1195).
    • e is the base of the natural logarithm (approximately 2.71828).
    • r is the risk-free interest rate (9.5% per annum or 0.095 as a decimal).
    • d is the dividend yield (3% per annum or 0.03 as a decimal).
    • T is the time to expiration in years (December 15 – September 15) / 365 = 3/12 = 0.25 years.

    Now, calculate the futures price:

    F = 1195 * e^(0.095 – 0.03) * 0.25 ≈ 1227.59

    The actual futures price on September 15 was 1225, so it was slightly underpriced (1227.59 – 1225 ≈ 2.59).

    ii. To profit from this mispricing, you can use an arbitrage transaction. Since the December futures were underpriced, you can buy the futures contract at the lower price and sell it at the higher theoretical price. Here’s the arbitrage transaction:

    1. Buy one December futures contract at 1225.
    2. Simultaneously, sell short the underlying asset (NSE-50 Index) at the spot price of 1195.

    Now, let’s calculate the gains and losses if the index on December 15 closes at the specified levels:

    a) If the index closes at 1260:

    • You buy back the futures contract at 1260.
    • You cover your short position in the index at 1260.
    • Your gain is (1260 – 1225) – (1260 – 1195) = 35 – 65 = -30.

    b) If the index closes at 1175:

    • You buy back the futures contract at 1175.
    • You cover your short position in the index at 1175.
    • Your gain is (1175 – 1225) – (1175 – 1195) = -50 + 20 = -30.

    In both cases, your gain or loss is -30. This means that regardless of where the index closes, you neither make nor lose money. The arbitrage transaction ensures a risk-free profit of -30, which is essentially a transaction cost.

    So, to answer your initial question about why you treat the dividend yield as periodic in this case, it’s because it’s given as a historical dividend yield on the index, which implies an ongoing periodic yield. However, if it were a one-time dividend payment, you wouldn’t include it in the calculation of the futures price. It’s important to be consistent with your approach based on the information provided in each specific problem.

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  9. Asked: September 5, 2023In: #Prep Strategy (CFA L1)

    CFA level1

    GOPAL456789 Advanced
    Added an answer on September 21, 2023 at 4:25 pm

    Preparing for the CFA Level 1 exam requires careful planning and dedication. Here's a general plan to help you get started for the February 2025 attempt: 1. Understand the Exam Format: Familiarize yourself with the CFA Level 1 exam format, including the number of questions, question types (multipleRead more

    Preparing for the CFA Level 1 exam requires careful planning and dedication. Here’s a general plan to help you get started for the February 2025 attempt:

    1. Understand the Exam Format:

    • Familiarize yourself with the CFA Level 1 exam format, including the number of questions, question types (multiple choice), and the time allotted for each session.

    2. Create a Study Schedule:

    • Create a detailed study plan that covers all the exam topics. Consider dedicating at least 300-350 hours of study time over a period of 4-6 months. Adjust this based on your personal schedule and familiarity with the material.

    3. Curriculum and Study Materials:

    • Obtain the official CFA Institute curriculum books, as they are the primary source of exam content. You may also supplement your study with third-party study materials, such as prep courses or review books.

    4. Study Efficiently:

    • Break down the curriculum into smaller sections or study sessions.
    • Use active learning techniques like summarizing material in your own words, taking notes, and solving practice problems.
    • Focus on understanding the core concepts rather than memorization.

    5. Practice, Practice, Practice:

    • Solve as many practice questions and mock exams as possible. This will help you get used to the exam format and improve your time management skills.
    • Take official CFA Institute practice exams to get a sense of the real exam environment.

    6. Review and Revise:

    • Regularly review the material you’ve covered to reinforce your understanding.
    • Create flashcards or summary notes for key concepts.
    • Allocate time for a final review in the weeks leading up to the exam.

    7. Mock Exams and Timed Practice:

    • Take several full-length mock exams under timed conditions to simulate the real exam.
    • Analyze your performance in practice exams to identify weak areas and focus on improving them.

    8. Ethics and Professional Standards:

    • Give special attention to the CFA Institute’s Code of Ethics and Standards of Professional Conduct. This is an important part of the exam.

    9. Stay Healthy and Manage Stress:

    • Maintain a healthy lifestyle with proper diet and exercise.
    • Manage stress through relaxation techniques and adequate sleep.

    10. Exam Day Preparation:

    • Review exam day logistics and requirements well in advance.
    • Ensure you have the necessary identification and exam materials.

    11. Stay Updated:

    • Keep up to date with any changes or updates from CFA Institute regarding the exam format or curriculum.

    Remember that preparation and consistency are key to success in the CFA Level 1 exam. Be sure to start early and stay committed to your study plan. It’s also a good idea to reach out to others who have passed the Level 1 exam for advice and support. Good luck with your preparation!

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  10. Asked: September 3, 2023In: Portf. Mgt (CFA L2)

    Portfolio Management – Economics & Investment markets

    Finance Pro
    Added an answer on September 21, 2023 at 4:23 pm
    This answer was edited.

    Statement 1: "the additional return required from investing in a nominal default-free investment for investing in a real default-free investment." This statement is incorrect because it is describing the concept of the real risk-free rate, which is a component of the discount rate. The real risk-freRead more

    1. Statement 1: “the additional return required from investing in a nominal default-free investment for investing in a real default-free investment.”

    This statement is incorrect because it is describing the concept of the real risk-free rate, which is a component of the discount rate. The real risk-free rate represents the return that an investor requires on a real (inflation-adjusted) default-free fixed-income security. While it is a key component of the discount rate, it is not the same as “the increased premium for more actively traded securities relative to less actively traded securities” mentioned in statement 3.

    1. Statement 2: “the expected return on an inflation-linked bond issued by the government of a developed country.”

    This statement is also incorrect because it is describing the expected return on an inflation-linked bond, which is indeed an important component of the discount rate. However, it is not the same as “the expected return on an inflation-linked bond issued by the government of a developed country” mentioned in statement 2. Statement 2 is essentially describing a specific type of investment, whereas the correct component of the discount rate is a more general concept – it represents the return required on a real (inflation-adjusted) default-free fixed-income security, which can include various types of bonds, not just those issued by a government of a developed country. Both statements 1 and 2 are incorrect because they provide descriptions that are either too specific (in the case of statement 2) or describe a different component of the discount rate (in the case of statement 1). Statement 3 is correct because it accurately describes the concept of a premium for more actively traded securities relative to less actively traded securities, which is one of the three key components of the discount rate.

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