Wiley Study Guide for 2017 Level II CFA Exam: Volume 1 ( )

Transcription

1 Wiley Study Guide for 2017 Level II CFA Exam: Volume 1 ( ) ERRATA Added text is underlined. Deleted text is struck out. Modified text is in bold. In some cases, additional text, before and/or after the change, may be included to clarify the context or specific location. Italicized text is FYI. No errata at this time.

2 Wiley Study Guide for 2017 Level II CFA Exam: Volume 2 ( ) ERRATA Added text is underlined. Deleted text is struck out. Modified text is in bold. In some cases, additional text, before and/or after the change, may be included to clarify the context or specific location. Italicized text is FYI. Page 92: In the second last paragraph on the page replace January 1, 2015 with January 1, Page 99: Example 3-3: Equity Method with Transactions with Associates In Example , we calculated equity income on Prime s (the investor s) income statement for 2010 to be $57,500 and the value of the investment in Alton on Prime s balance sheet for 2010 to be $732,500. Suppose that the following transactions also took place. Page 138: Replace the value for Add: Current service cost with 6,

3 Wiley Study Guide for 2017 Level II CFA Exam: Volume 3 ( ) ERRATA Added text is underlined. Deleted text is struck out. Modified text is in bold. In some cases, additional text, before and/or after the change, may be included to clarify the context or specific location. Italicized text is FYI. Page 135: Delete both instances of t = marginal tax rate of the comparable company on the page Page 135: Delete (1-t) from the first two formulas on the page. Page 135: Delete and marginal tax rate of 40% from the first paragraph of Example 2-7. Page 135: Page 135: ββ ASSET = ββ EQUITY ββ ASSET = (1 0.4)2 1 1+(1 tt) DD EE = Page 136: ββ PROJECT = ββ ASSET 1 + (1 tt) DD EE ββ PROJECT = [1 + ((1 0.35)1.5)] = Finally, we use the project s cost of equity and the component weights to calculate the WACC of Rukaiya s confectionaries project: Cost of equity = re = 4.5% (11% 4.5%) = % Rukaiya s D/E ratio is given as 1.5. It has 1.5 units of debt for every unit of equity (the denominator of the D/E ratio is 1). The ratio of debt to equity is 1.5 to 1, or 3:2. The weight for debt in the capital structure is therefore 3/(3+2) or 0.6 [(D/D+E)] and that of equity is 2/(3+2)or 0.4 [E/(D+E)]. WACC = (wd)(rd)(1 t) + (we)(re) WACC = 0.6 (6%)(1 0.35) ( %) = %

4 Page 145: 2. a. ABC s average SG&A per square foot in 2012 and 2010 were $209 (= 20,005/95.8) and $201 (= 18,321/91) respectively, which implies an increase of approximately 4% over the period. For XYZ, average SG&A per square foot stood at $249 for 2012 and $245 for 2010, implying an increase of approximately 2%. SG&A per square foot is often used by retail analysts as a quantitative measure to assess customer service. Since, ABC XYZ spends a higher amount on SG&A per square foot than XYZ ABC, we may conclude that ABC XYZ offers higher service levels than XYZ ABC. Further, the customer service gap between the two companies is increasing decreasing as ABC s average SG&A per square foot has grown faster than that of XYZ over the recent past.

5 Wiley Study Guide for 2017 Level II CFA Exam: Volume 4 ( ) ERRATA Added text is underlined. Deleted text is struck out. Modified text is in bold. In some cases, additional text, before and/or after the change, may be included to clarify the context or specific location. Italicized text is FYI. Page 9: Replace (1 + 2s0) 2 in Example 1-4 with (1 + 2 s 0 ) 2 Page 9: Replace (1 + 3s0) 3 in Example 1-4 with (1 + 3 s 0 ) 3 Page 35: Replace the last formula on the page with the following: V 1 VHHL + C VHLL + C = r2, HL 1 r + + 2, HL Page 40: Add a % following in the bottom box in column t=2 Page 56: Replace the second bullet on the page with: If the call price increases (decreases), the value of the callable bond will decrease (increase). Page 126: In Scenario 1, the value of the forward contract (to the long position) at initiation is calculated as: V 0 (0,T) = S 0 [F 0 (0,T) / 1 + r) T ] V 0 (0,1) = 100 [ / ) 1 ] = $ In Scenario 2, the value of the forward contract at initiation is calculated as: V 0 (0,T) = S 0 [F 0 (0,T) / 1 + r) T ] V 0 (1) = 100 [ / ) 1 ] = $ Page 136: Replace the last formula in Example 1-8 with: FRA payoff = -$1,250/[1+( /360)]= $1, Page 161: Example 2-7: Equity Swap Valuation Six months ago, we entered a receive-fixed, pay-equity 5-year annual reset swap in which the fixed leg is based on a 30/360 day count and the notional amount was $10 million. The initial swap fixed rate was 2.5%, while the equity was trading at $127 per share. Today, all spot interest rates are % (the term structure is flat), while the equity is trading at $135.

6 Page 182: In Table 2-2 replace the n in the leftmost and center boxes with an h. Page 195: In the last bullet point on the page replace 2 x 3 with 6 x 9. Page 220: $500,000,000 ($250 2,100) = contracts or contracts rounded. Page 221: At the settlement of the contract, the S&P 500 Index is trading at 2,130, an increase of 30 index points, which corresponds with an increase of 1.43%. As the manager is short futures contracts, he will lose money on the futures position: Gain/loss on futures contract = Change in equity index Multiplier Number of contracts = 30 points per contract $250 per point contracts = $71,500 7,140,000 (loss) The manager's physical portfolio increases by 1.43%: $500,000, % = $71,500 7,142,857(gain) Note that the loss of $75,000 on the futures contract exceeds is lower than the gain on the underlying portfolio, which is the hedged position that the manager wanted. The difference results from having to round to contracts when only contracts short were needed. In this case, the manager's view on the market direction was wrong. Had it been known with certainty that the market would increase, hedging would not have been necessary. Sometimes, managers make the wrong call, but we have to remember that the goal of hedging is to reduce risk, and this was effectively accomplished.

7 Wiley Study Guide for 2017 Level II CFA Exam: Volume 5 ( ) ERRATA Added text is underlined. Deleted text is struck out. Modified text is in bold. In some cases, additional text, before and/or after the change, may be included to clarify the context or specific location. Italicized text is FYI. No errata at this time.

8 Wiley Practice Questions for 2017 Level II CFA Exam ( ) ERRATA Added text is underlined. Deleted text is struck out. Modified text is in bold. In some cases, additional text, before and/or after the change, may be included to clarify the context or specific location. Italicized text is FYI. Page 7: 12. All of the following policies are recommended procedures for compliance with Standard III(C): Misrepresentation, except: A. Refrain from using third party research. B. Use factual presentation to describe the Provide a written list of services offered by a firm and the qualifications of the firm s employees. C. Verify outside information. Encourage firms to verify outside information. Page 17: 12. Answer: A Recommended procedures for compliance with Standard I(C): Misrepresentation include using factual information to describe a firm s services and the qualifications and abilities of its employees. Third party research is allowed to be used, but any outside information that is relied upon must be verified for accuracy. Covered persons should encourage their firm to develop procedures for verifying soundness of information obtained from outside sources. Page 45: 10. A hypothesis test Based on the computed confidence interval, a hypothesis test that the true beta for GE Stock is equal to 1 would most likely lead us to conclude that GE stock s beta equals one at the 1% level of significance. A. GE stock s beta equals 1. There is no evidence to reject the null B. The null should be rejected and that GE stock s beta is greater than 1. C. The null should be rejected and that GE stock s beta does not equal 1. Page 53: 10. Answer: A Since the hypothesized value of the population parameter lies within the computed interval, we fail to reject the null hypothesis. The researcher would conclude that GE stock s beta equals 1. Page 103: Delete m from the end of all 3 answer choices in question 14.. Page 114: Delete all instances of m in the answer explanation of question 14

9 Page 146: 23. ABC Company sets up an SPV to securitize accounts receivables. Given that ABC continues to bear the risk of non-realization of those receivables, which of the following is the least likely result from an analyst performing the appropriate adjustments to ABC s financial statements to reflect the fact that the overall arrangement is merely a collateralized borrowing? A. The current ratio would be higher. B. Total cash flow would be the same. C. CFO would be higher. Page 151: 14. Answer: A Cash and receivables = $16,500,000 + $820,000 = $17,320,000 Inventory = $15,000,000 + $5,750,000 = $20,750,000 Net PP&E = $38,500,000 + $6,500,000 = $46,500,000 45,000,000 Goodwill = $7,280,000 Total assets = $17,320,000 + $20,750,000 + $46,500,000 45,000,000 + $7,280,000 = $91,850,000 Additional paid-in capital = Parent s additional paid-in capital + (Market value of shares issued Par value of shares issued) Additional paid-in capital = $12,000,000 + [($15 1,000,000) ($1.5 1,000,000)] Additional paid-in capital = $25,500,000 Page 286: 24. The stock of Tulip Inc. is currently trading at $78.30 per share. The company recently paid a dividend of $1.50 per share. Next year s expected dividend growth The current dividend growth rate of 12% is expected to decline linearly over the next 6 years to a long-term constant growth rate of 5%. Given that the stock is fairly priced, the required rate of return on the stock is closest to: A. 2.41% B. 7.41% C %

10 Page 299: 19. Shamrock Ltd. s most recent FCFE per share amounted to $0.6. An analyst has the following expectations regarding the company s growth in FCFE: FCFE will grow at a rate of 40% for the next three years, during which investors required rate of return will be 20%. During the following two years, FCFE growth will decline by 15% percentage points per year towards its stable long-term growth rate. During this time, investors required rate of return will be 16%. From Year 6 onwards, FCFE will grow at a stable long-term growth rate of 10%, during which investors required rate of return will be 12%. The intrinsic value of the company s stock today is closest to: A. $59 B. $58 C. $56 Page 305: Answer: B High Growth Period Transitional Period Stable Growth g = 40% g declines by 15% per year g = 10% Years FCFE ($) Terminal value in Year Discount factors Present values Sum of present values Page 392: Delete question 19. Page 402: The correct answer to question 5 is A.

11 Page 404: 15. Answer: C B V 9/12 (9/12) = = $2.16 This represents a gain to the long position. Loss on spot = $5 (calculated as $100 $95) Net loss = $2.84 (95 x (1 + (0.04 x 9/12))) = = This would be positive and closest to a GAIN of 2.16 Page 420: 24. Consider the following statements: Statement 1: The underlying on an interest rate call option on 3-month Libor that expires in 6 months is a 3-month Libor deposit that is made after 6 months and matures 9 months from option initiation. Statement 2: An interest rate put option gives the put buyer the right to a certain cash payment when the underlying interest rate is below the exercise rate when depositing cash. Which of the following is most likely? A. Only Statement 1 is correct. B. Only Statement 2 is correct. C. Both statements are incorrect. Page 430: 24. Answer: B For an interest rate call option on 3-month Libor that expires in 6 months: The underlying is a forward rate agreement (FRA) on 3-month Libor that expires in 6 months. The underlying of the FRA is a 3-month Libor deposit that is made after 6 months and matures 9 months from option initiation. (It is a FRA.) An interest rate call option gives the call buyer the right to a certain cash payment when the underlying interest rate exceeds the exercise rate. An interest rate put option gives the put buyer the right to a certain cash payment when the underlying interest rate is below the exercise rate when depositing cash. This is because if interest rates fall below the exercise rate, profits from exercising the put option cancel out losses on the interest rate on the deposit. Page 433: The correct answer to question 39 is B.

12 Page 434: 3. An investment management company wishes to reduce $250,000,000 of equity exposure and enters into an equity swap with a dealer that involves exchanging the equity return for LIBOR swaps $250 million of equity return for LIBOR. Over the past six months, the equity market has decreased by 2.0% while three six-month LIBOR was 1.25% on an annual basis. The investment management company most likely receives from the dealer: A. $4,218,750 4,062,500 B. $5,781,250 C. $8,125,000 Page 438: 3. Answer: B Choice A is incorrect. The manager also receives LIBOR in the swap and receives, not pays, an additional $250,000, /12 = $781,250. Choice B is correct. To reduce exposure in an equity swap, the manager pays the equity return and receives LIBOR. In this case, the equity market decreased by 2.0%, so the manager receives this payment from the dealer, which equals $250,000, = $5,000,000. The manager also receives LIBOR for three months, which equals $250,000, /12 = $781,250. Choice C is incorrect. LIBOR for three months is quoted on an annual basis, so the LIBOR leg must be deannualized, which equals $250,000, /12 = $781,250. The management company has swapped his equity return, which in this case was negative, for LIBOR. Therefore, the management company receives rather than pays $2,500,000 ($250 million x 2% x 6/12). In addition, the company receives LIBOR for six months of $1,562,500 ($250 million x 1.25% x 6/12) Page 535: Replace the answer explanation for question 4 with the following: Highest Sharpe Ratio = [SR B 2 +IR 2 ] 1/2 = [ ] 1/2 = 0.5