CFA 2018 level 2 schweser notes book 2

Table of Contents Getting Started Flyer Table of Contents Page List Book 2: Financial Reporting and Analysis and Corporate Finance Readings and Learning Outcome Statements Intercorporate Investments LOS 16.a: Describe the classification, measurement, and disclosure under International Financial Reporting Standards (IFRS) for 1) investments in financial assets, 2) investments in associates, 3) joint ventures, 4) business combinations, and 5) special purpose and variable interest entities LOS 16.b: Distinguish between IFRS and US GAAP in the classification, measurement, and disclosure of investments in financial assets, investments in associates, joint ventures, business combinations, and special purpose and variable interest entities LOS 16.c: Analyze how different methods used to account for intercorporate investments affect financial statements and ratios Key Concepts LOS 16.a LOS 16.b LOS 16.c Concept Checkers Answers – Concept Checkers Challenge Problems Answers – Challenge Problems Employee Compensation: Post-Employment and Share-Based LOS 17.a: Describe the types of post-employment benefit plans and implications for financial reports LOS 17.b: Explain and calculate measures of a defined benefit pension obligation (i.e., present value of the defined benefit obligation and projected benefit obligation) and net pension liability (or asset) LOS 17.c: Describe the components of a company’s defined benefit pension costs LOS 17.d: Explain and calculate the effect of a defined benefit plan’s assumptions on the defined benefit obligation and periodic pension cost LOS 17.e: Explain and calculate how adjusting for items of pension and other post-employment benefits that are reported in the notes to the financial statements affects financial statements and ratios LOS 17.f: Interpret pension plan note disclosures including cash flow related information LOS 17.g: Explain issues associated with accounting for share-based compensation LOS 17.h: Explain how accounting for stock grants and stock options affects financial statements, and the importance of companies’ assumptions in valuing these grants and options Key Concepts LOS 17.a LOS 17.b LOS 17.c LOS 17.d LOS 17.e LOS 17.f LOS 17.g LOS 17.h 10 Concept Checkers Answers – Concept Checkers 11 Challenge Problems Answers – Challenge Problems Multinational Operations LOS 18.a: Distinguish among presentation (reporting) currency, functional currency, and local currency LOS 18.b: Describe foreign currency transaction exposure, including accounting for and disclosures about foreign currency transaction gains and losses LOS 18.c: Analyze how changes in exchange rates affect the translated sales of the subsidiary and parent company LOS 18.d: Compare the current rate method and the temporal method, evaluate how each affects the parent company’s balance sheet and income statement, and determine which method is appropriate in various scenarios LOS 18.e: Calculate the translation effects and evaluate the translation of a subsidiary’s balance sheet and income statement into the parent company’s presentation currency LOS 18.f: Analyze how the current rate method and the temporal method affect financial statements and ratios LOS 18.g: Analyze how alternative translation methods for subsidiaries operating in hyperinflationary economies affect financial statements and ratios LOS 18.h: Describe how multinational operations affect a company’s effective tax rate LOS 18.i: Explain how changes in the components of sales affect the sustainability of sales growth 10 LOS 18.j: Analyze how currency fluctuations potentially affect financial results, given a company’s countries of operation 11 Key Concepts LOS 18.a LOS 18.b LOS 18.c LOS 18.d LOS 18.e LOS 18.f LOS 18.g LOS 18.h LOS 18.i 10 LOS 18.j 12 Concept Checkers Answers – Concept Checkers 13 Challenge Problems Answers – Challenge Problems Evaluating Quality of Financial Reports LOS 19.a: Demonstrate the use of a conceptual framework for assessing the quality of a company’s financial reports LOS 19.b: Explain potential problems that affect the quality of financial reports LOS 19.c: Describe how to evaluate the quality of a company’s financial reports.; LOS 19.d: Evaluate the quality of a company’s financial reports LOS 19.f: Describe indicators of earnings quality LOS 19.e: Describe the concept of sustainable (persistent) earnings LOS 19.g: Explain mean reversion in earnings and how the accruals component of earnings affects the speed of mean reversion LOS 19.h: Evaluate the earnings quality of a company LOS 19.i: Describe indicators of cash flow quality LOS 19.j: Evaluate the cash flow quality of a company 10 LOS 19.k: Describe indicators of balance sheet quality 11 LOS 19.l: Evaluate the balance sheet quality of a company 12 LOS 19.m: Describe sources of information about risk 13 Key Concepts LOS 19.a LOS 19.b LOS 19.c LOS 19.d LOS 19.e LOS 19.f LOS 19.g LOS 19.h LOS 19.i 10 LOS 19.j 11 LOS 19.k 12 LOS 19.l 13 LOS 19.m 14 Concept Checkers Answers – Concept Checkers 10 Integration of Financial Statement Analysis Techniques LOS 20.a: Demonstrate the use of a framework for the analysis of financial statements, given a particular problem, question, or purpose (e.g., valuing equity based on comparables, critiquing a credit rating, obtaining a comprehensive picture of financial leverage, evaluating the perspectives given in management’s discussion of financial results) LOS 20.b: Identify financial reporting choices and biases that affect the quality and comparability of companies’ financial statements and explain how such biases may affect financial decisions LOS 20.e: Analyze and interpret how balance sheet modifications, earnings normalization, and cash flow statement related modifications affect a company’s financial statements, financial ratios, and overall financial condition LOS 20.c: Evaluate the quality of a company’s financial data, and recommend appropriate adjustments to improve quality and comparability with similar companies, including adjustments for differences in accounting standards, methods, and assumptions LOS 20.d: Evaluate how a given change in accounting standards, methods, or assumptions affects financial statements and ratios Key Concepts LOS 20.a LOS 20.b LOS 20.c LOS 20.d LOS 20.e Concept Checkers Answers – Concept Checkers 11 Self-Test: Ethical and Professional Standards Self-Test Answers: Ethical and Professional Standards 12 Capital Budgeting LOS 21.a: Calculate the yearly cash flows of expansion and replacement capital projects and evaluate how the choice of depreciation method affects those cash flows LOS 21.b: Explain how inflation affects capital budgeting analysis LOS 21.c: Evaluate capital projects and determine the optimal capital project in situations of 1) mutually exclusive projects with unequal lives, using either the least common multiple of lives approach or the equivalent annual annuity approach, and 2) capital rationing LOS 21.d: Explain how sensitivity analysis, scenario analysis, and Monte Carlo simulation can be used to assess the stand-alone risk of a capital project LOS 21.e: Explain and calculate the discount rate, based on market risk methods, to use in valuing a capital project LOS 21.f: Describe types of real options and evaluate a capital project using real options LOS 21.g: Describe common capital budgeting pitfalls LOS 21.h: Calculate and interpret accounting income and economic income in the context of capital budgeting LOS 21.i: Distinguish among the economic profit, residual income, and claims valuation models for capital budgeting and evaluate a capital project using each 10 Key Concepts LOS 21.a LOS 21.b LOS 21.c LOS 21.d LOS 21.e LOS 21.f LOS 21.g LOS 21.h LOS 21.i 11 Concept Checkers Answers – Concept Checkers 12 Challenge Problems Answers – Challenge Problems 13 Capital Structure LOS 22.a: Explain the Modigliani–Miller propositions regarding capital structure, including the effects of leverage, taxes, financial distress, agency costs, and asymmetric information on a company’s cost of equity, cost of capital, and optimal capital structure LOS 22.b: Describe target capital structure and explain why a company’s actual capital structure may fluctuate around its target LOS 22.c: Describe the role of debt ratings in capital structure policy LOS 22.d: Explain factors an analyst should consider in evaluating the effect of capital structure policy on valuation LOS 22.e: Describe international differences in the use of financial leverage, factors that explain these differences, and implications of these differences for investment analysis Key Concepts LOS 22.a LOS 22.b LOS 22.c LOS 22.d LOS 22.e Concept Checkers Answers – Concept Checkers Challenge Problems Answers – Challenge Problems 14 Dividends and Share Repurchases: Analysis LOS 23.a: Describe the expected effect of regular cash dividends, extra dividends, liquidating dividends, stock dividends, stock splits, and reverse stock splits on shareholders' wealth and a company's financial ratios LOS 23.b: Compare theories of dividend policy and explain implications of each for share value given a description of a corporate dividend action LOS 23.c: Describe types of information (signals) that dividend initiations, increases, decreases, and omissions may convey LOS 23.d: Explain how clientele effects and agency costs may affect a company’s payout policy LOS 23.e: Explain factors that affect dividend policy in practice LOS 23.f: Calculate and interpret the effective tax rate on a given currency unit of corporate earnings under double taxation, dividend imputation, and split-rate tax systems LOS 23.g: Compare stable dividend, constant dividend payout ratio, and residual dividend payout policies, and calculate the dividend under each policy LOS 23.h: Compare share repurchase methods LOS 23.i: Calculate and compare the effect of a share repurchaseshare repurchase on earnings per share when 1) the repurchase is financed with the company's surplus cash and 2) the company uses debt to finance the repurchase 10 LOS 23.j: Calculate the effect of a share repurchase on book value per share 11 LOS 23.k: Explain the choice between paying cash dividends and repurchasing shares 12 LOS 23.l: Describe broad trends in corporate payout policies 13 LOS 23.m: Calculate and interpret dividend coverage ratios based on 1) net income and 2) free cash flow 14 LOS 23.n: Identify characteristics of companies that may not be able to sustain their cash dividend 15 Key Concepts LOS 23.a LOS 23.b LOS 23.c LOS 23.d LOS 23.e LOS 23.f LOS 23.g LOS 23.h LOS 23.i 10 LOS 23.j 11 LOS 23.k 12 LOS 23.l 13 LOS 23.m 14 LOS 23.n 16 Concept Checkers Answers – Concept Checkers 17 Challenge Problems Answers – Challenge Problems 15 Corporate Performance, Governance, and Business Ethics LOS 24.a: Compare interests of key stakeholder groups and explain the purpose of a stakeholder impact analysis LOS 24.b: Discuss problems that can arise in principal–agent relationships and mechanisms that may mitigate such problems LOS 24.c: Discuss roots of unethical behavior and how managers might ensure that ethical issues are considered in business decision making LOS 24.d: Compare the Friedman doctrine, Utilitarianism, Kantian Ethics, and Rights and Justice Theories as approaches to ethical decision making Key Concepts LOS 24.a LOS 24.b LOS 24.c LOS 24.d Concept Checkers Answers – Concept Checkers 16 Corporate Governance LOS 25.a: Describe objectives and core attributes of an effective corporate governance system and evaluate whether a company’s corporate governance has those attributes LOS 25.b: Compare major business forms and describe the conflicts of interest associated with each LOS 25.c: Explain conflicts that arise in agency relationships, including manager–shareholder conflicts and director–shareholder conflicts LOS 25.d: Describe responsibilities of the board of directors and explain qualifications and core competencies that an investment analyst should look for in the board of directors LOS 25.e: Explain effective corporate governance practice as it relates to the board of directors and evaluate strengths and weaknesses of a company’s corporate governance practice LOS 25.f: Describe elements of a company’s statement of corporate governance policies that investment analysts should assess LOS 25.g: Describe environmental, social, and governance risk exposures; LOS 25.h : Explain the valuation implications of corporate governance Key Concepts LOS 25.a LOS 25.b LOS 25.c LOS 25.d LOS 25.e LOS 25.f LOS 25.g LOS 25.h 10 Concept Checkers Answers – Concept Checkers 11 Challenge Problems Answers – Challenge Problems 17 Mergers and Acquisitions LOS 26.a: Classify merger and acquisition (M&A) activities based on forms of integration and relatedness of business activities LOS 26.b: Explain common motivations behind M&A activity LOS 26.c: Explain bootstrapping of earnings per share (EPS) and calculate a company’s post-merger EPS LOS 26.d: Explain, based on industry life cycles, the relation between merger motivations and types of mergers LOS 26.e: Contrast merger transaction characteristics by form of acquisition, method of payment, and attitude of target management LOS 26.f: Distinguish among pre-offer and post-offer takeover defense mechanisms LOS 26.g: Calculate and interpret the Herfindahl–Hirschman Index and evaluate the likelihood of an antitrust challenge for a given business combination LOS 26.i: Calculate free cash flows for a target company and estimate the company’s intrinsic value based on discounted cash flow analysis LOS 26.j: Estimate the value of a target company using comparable company and comparable transaction analyses 10 LOS 26.h: Compare the discounted cash flow, comparable company, and comparable transaction analyses for valuing a target company, including the advantages and disadvantages of each 11 LOS 26.k: Evaluate a takeover bid and calculate the estimated postacquisition value of an acquirer and the gains accrued to the target shareholders versus the acquirer shareholders 12 LOS 26.l: Explain how price and payment method affect the distribution of risks and benefits in M&A transactions 13 LOS 26.m: Describe characteristics of M&A transactions that create value 14 LOS 26.n: Distinguish among equity carve-outs, spin-offs, split-offs, and liquidation 15 LOS 26.o: Explain common reasons for restructuring 16 Key Concepts 17 The average stock price of Flueger Systems under the comparable company approach for the three relative valuation ratios, assuming it is traded at the mean of the three valuations, is closest to: A $27.50 B $30.33 C $32.00 The calculation for the relative value valuation is shown in the following figures: 18 Using the comparable company approach, the mean takeover premium and the estimate of the fair acquisition price for Flueger Systems are closest to a: A 22.4% premium and a $37.12 acquisition price B 22.4% premium and a $40.28 acquisition price C 15.6% premium and a $37.12 acquisition price The calculation for the mean takeover premium is: Applying this value to the mean comparable company valuation calculated in Question 17 gives us: $30.33 × 1.224 = $37.12 19 The fair acquisition price for Flueger Systems using the comparable transaction approach is closest to: A B C $30.33 $32.50 $37.20 The calculation for the fair acquisition price under the comparable transaction approach is shown in the following figures: 20 Are Collier and Baldwin correct in regard to their suggestions to Tyler about potential courses of action if there is a hostile takeover? A Both are correct B Both are incorrect C Only one is correct Both Collier’s statement and Baldwin’s statement are incorrect Collier suggests using a fair price amendment after the takeover is announced; however, a fair price amendment is a pre-offer defense, not a post-offer defense Baldwin’s statement is incorrect because he is actually describing a white squire defense, not a white knight defense SELF-TEST: CORPORATE FINANCE You have now finished the Corporate Finance topic section The following self-test will provide immediate feedback on how effective your study of this material has been The test is best taken timed; allow minutes per subquestion (18 minutes per item set) This self-test is more exam-like than typical Concept Checkers or QBank questions A score less than 70% suggests that additional review of this topic is needed Use the following information for Questions through The CEO of Edgington Enterprises, Nicole Johnson, is conferring with her finance staff regarding the plans for capital projects during the upcoming year Like most firms, Edgington is capital constrained, and Johnson wants to make the most out of what is available During the meeting, several issues are raised While inflation has recently been low, some evidence is present in the commodities markets to suggest that it could become a concern during the life of even a medium-term project Johnson knows that inflation can have a significant impact on project selection The staff is asked how an increase in the rate of inflation might affect the capital budgeting process The following data pertains to two capital projects currently under consideration The cost of both projects is $30 million Net Present Value Life in Years Project Andover $35,000,000 Project Baltimore $25,000,000 Johnson informs the staff that it appears that the firm will have only $30 million available for investment during the upcoming year, so a choice will have to be made The finance staff estimates that the firm’s after-tax WACC is 7.5% In recent months, there has been a vigorous discussion in the financial press about the need to manage risk During this past November, Johnson attended a threeday seminar on risk management at the University of Chicago One of the key points made by seminar faculty was that reducing risk, even if there is a cost incurred to so, can increase firm value Johnson has asked the finance team how project risk is evaluated, and what type of risk is being measured during the capital budgeting process Another key point made during the seminar was that some projects are not well evaluated with traditional capital budgeting methods, such as NPV These are projects that require management to make critical decisions after the commitment to undertake the project has been made, and at least part of the project’s capital has been invested She wonders if the finance staff is familiar with the evaluation of such projects As the meeting was coming to a close, Marques Wilson, CFA, suggested to the staff that it may be useful to try to connect project performance with incremental changes in firm value To this end, he suggests that it may be useful to attempt to measure a project’s economic profits These can be used to infer how the project is affecting overall firm value Johnson charged the staff with giving consideration to the matters raised during the meeting before they reconvene at the end of the week After work, Johnson heads out to teach a CFA review course for her local society The topic for that evening coincides with her work in corporate finance, but focuses more on mergers and acquisitions She presents the class with the following case study: Toulouse Tempered Steel Industries (TTS) is weighing its strategic options following a wave of mergers in the industry across Europe and worldwide Pascal LaPage, managing director of TTS is wondering whether it makes sense for the firm to position itself as a standalone entity, or if the firm should be pursuing a merger/acquisition of another firm that would provide a good strategic fit Lyon Bank has been the firm’s primary lender for many years, and Alaine Clamon, CFA, from Lyon’s corporate finance department is due to meet with LaPage and other members of the firm’s finance group to discuss some strategic options Clamon begins his presentation with the underlying rationale for even considering a merger or acquisition as a strategic alternative Some reasons cited by Clamon that can be used to justify a merger are the pursuit of economies of scale, the elimination of operating inefficiencies, and diversification of the firm’s assets In general, the underlying rationale helps to determine what type of merger the firm will be undertaking LaPage asks his staff to keep these in mind as they seek suitable candidates for evaluation LaPage’s team has already identified two firms that might be good acquisition candidates for TTS One is Aragon Metals, and the other is Brittany Engineered Products A member of the staff asks Clamon about types of takeover defenses that might by employed by either Aragon or Brittany Clamon replies that these fall broadly into two categories: pre-offer and post-offer defenses As examples of pre-offer defenses, he describes staggered boards and supermajority voting provisions As an example of post-offer defenses, he describes the sale of significant assets He notes that, obviously, TTS must take care to account for the ramifications of the presence of any takeover defenses The three categories of cash flows that are typically associated with a capital project are: A financing, operating, and terminal year B initial investment outlay, operating, and financing C initial investment outlay, operating, and terminal year Suppose that there are two scenarios for projects Andover and Baltimore Under Scenario 1, the projects cannot be replicated, while under Scenario 2, the projects can be replicated Which project should be accepted? Scenario A Andover B Andover C Baltimore Scenario Baltimore Andover Andover When the value of a given project is contingent upon future decisions of management, the project can be best described as containing: A real options B flexibility options C timing options Suppose that the firm has a project code named Richmond The dollar amount of the investment in Richmond is $40 million Last year, Richmond’s EBIT was $6 million If the relevant tax rate is 35%, what was Richmond’s economic profit during the past year? A $900,000 B $3,900,000 C $2,100,000 With regard to the list of sensible motives for undertaking a merger cited by Clamon in Johnson’s case study, he is: A correct with regard to operating inefficiencies, and correct with regard to diversification B correct with regard to operating inefficiencies, but incorrect with regard to diversification C incorrect with regard to operating inefficiencies, but correct with regard to diversification With respect to the takeover defenses described by Clamon, he is: A incorrect with regard to the pre-offer defenses listed, and incorrect with regard to the post-offer defense listed B incorrect with regard to the pre-offer defenses listed, but correct with regard to the post-offer defense listed C correct with regard to the pre-offer defenses listed, and correct with regard to the post-offer defense listed SELF-TEST ANSWERS: CORPORATE FINANCE Use the following information for Questions through The CEO of Edgington Enterprises, Nicole Johnson, is conferring with her finance staff regarding the plans for capital projects during the upcoming year Like most firms, Edgington is capital constrained, and Johnson wants to make the most out of what is available During the meeting, several issues are raised While inflation has recently been low, some evidence is present in the commodities markets to suggest that it could become a concern during the life of even a medium-term project Johnson knows that inflation can have a significant impact on project selection The staff is asked how an increase in the rate of inflation might affect the capital budgeting process The following data pertains to two capital projects currently under consideration The cost of both projects is $30 million Net Present Value Life in Years Project Andover $35,000,000 Project Baltimore $25,000,000 Johnson informs the staff that it appears that the firm will have only $30 million available for investment during the upcoming year, so a choice will have to be made The finance staff estimates that the firm’s after-tax WACC is 7.5% In recent months, there has been a vigorous discussion in the financial press about the need to manage risk During this past November, Johnson attended a threeday seminar on risk management at the University of Chicago One of the key points made by seminar faculty was that reducing risk, even if there is a cost incurred to so, can increase firm value Johnson has asked the finance team how project risk is evaluated, and what type of risk is being measured during the capital budgeting process Another key point made during the seminar was that some projects are not well evaluated with traditional capital budgeting methods, such as NPV These are projects that require management to make critical decisions after the commitment to undertake the project has been made, and at least part of the project’s capital has been invested She wonders if the finance staff is familiar with the evaluation of such projects As the meeting was coming to a close, Marques Wilson, CFA, suggested to the staff that it may be useful to try to connect project performance with incremental changes in firm value To this end, he suggests that it may be useful to attempt to measure a project’s economic profits These can be used to infer how the project is affecting overall firm value Johnson charged the staff with giving consideration to the matters raised during the meeting before they reconvene at the end of the week After work, Johnson heads out to teach a CFA review course for her local society The topic for that evening coincides with her work in corporate finance, but focuses more on mergers and acquisitions She presents the class with the following case study: Toulouse Tempered Steel Industries (TTS) is weighing its strategic options following a wave of mergers in the industry across Europe and worldwide Pascal LaPage, managing director of TTS is wondering whether it makes sense for the firm to position itself as a standalone entity, or if the firm should be pursuing a merger/acquisition of another firm that would provide a good strategic fit Lyon Bank has been the firm’s primary lender for many years, and Alaine Clamon, CFA, from Lyon’s corporate finance department is due to meet with LaPage and other members of the firm’s finance group to discuss some strategic options Clamon begins his presentation with the underlying rationale for even considering a merger or acquisition as a strategic alternative Some reasons cited by Clamon that can be used to justify a merger are the pursuit of economies of scale, the elimination of operating inefficiencies, and diversification of the firm’s assets In general, the underlying rationale helps to determine what type of merger the firm will be undertaking LaPage asks his staff to keep these in mind as they seek suitable candidates for evaluation LaPage’s team has already identified two firms that might be good acquisition candidates for TTS One is Aragon Metals, and the other is Brittany Engineered Products A member of the staff asks Clamon about types of takeover defenses that might by employed by either Aragon or Brittany Clamon replies that these fall broadly into two categories: pre-offer and post-offer defenses As examples of pre-offer defenses, he describes staggered boards and supermajority voting provisions As an example of post-offer defenses, he describes the sale of significant assets He notes that, obviously, TTS must take care to account for the ramifications of the presence of any takeover defenses The three categories of cash flows that are typically associated with a capital project are: A financing, operating, and terminal year B initial investment outlay, operating, and financing C initial investment outlay, operating, and terminal year The three typical categories regarding capital project cash flows are initial investment outlay, operating, and terminal year Suppose that there are two scenarios for projects Andover and Baltimore Under Scenario 1, the projects cannot be replicated, while under Scenario 2, the projects can be replicated Which project should be accepted? Scenario A Andover B Andover C Baltimore Scenario Baltimore Andover Andover If the projects cannot be replicated, then the project with the greatest NPV should be selected, and this is Andover If the projects can be replicated, we can evaluate the projects using either a least common lives approach or an equivalent annual annuity approach The least common multiple of the projects’ lives is 40 years, and the replacement chain NPVs are $75.25 million for Andover and $77.83 million for Baltimore The equivalent annual annuity values are $5.975 million for Andover and $6.179 million for Baltimore Both methods indicate that Baltimore should be chosen if the projects can be replicated When the value of a given project is contingent upon future decisions of management, the project can be best described as containing: A real options B flexibility options C timing options When a project’s value is a function of managerial decisions that must be made in periods following the investment, the project is said to contain real options The other answers are simply types of real options that may be present in a project Suppose that the firm has a project code named Richmond The dollar amount of the investment in Richmond is $40 million Last year, Richmond’s EBIT was $6 million If the relevant tax rate is 35%, what was Richmond’s economic profit during the past year? A $900,000 B $3,900,000 C $2,100,000 The economic profit is calculated as: EP = NOPAT – $WACC = $6(1 – 0.35) – $40(0.075) = $0.9 million With regard to the list of sensible motives for undertaking a merger cited by Clamon in Johnson’s case study, he is: A B C correct with regard to operating inefficiencies, and correct with regard to diversification correct with regard to operating inefficiencies, but incorrect with regard to diversification incorrect with regard to operating inefficiencies, but correct with regard to diversification Pursuing a merger where the underlying rationale is to eliminate operating inefficiencies is generally considered sensible A merger in pursuit of diversification is generally not seen as sensible, because it is ordinarily much more cost-effective for shareholders to diversify on their own With respect to the takeover defenses described by Clamon, he is: A incorrect with regard to the pre-offer defenses listed, and incorrect with regard to the post-offer defense listed B incorrect with regard to the pre-offer defenses listed, but correct with regard to the post-offer defense listed C correct with regard to the pre-offer defenses listed, and correct with regard to the post-offer defense listed In both cases, Clamon has correctly provided examples of pre-offer and post-offer takeover defenses FORMULAS STUDY SESSIONS AND 6: FINANCIAL REPORTING AND ANALYSIS funded status of the plan: funded status = fair value of plan assets – PBO total periodic pension cost = contributions – (ending funded status – beginning funded status) Professor’s Note: Not all of the following ratios are used in this book However, this list includes most of the common ratios that you are likely to encounter on exam day defensive interval ratio = (cash + short-term marketable investments + receivables) ÷ daily cash expenditures cash generated from operations (CGO) = operating cash flow + cash interest + cash taxes = EBIT + non-cash charges – increase in working capital accrualsCF = NI – CFO – CFI STUDY SESSIONS AND 8: CORPORATE FINANCE outlay = FCInv + NWCInv after-tax operating cash flow (CF) = (S – C – D)(1 – T) + D = (S – C)(1 – T) + (TD) TNOCF = SalT + NWCInv – T (SalT – BT) economic income = cash flow + (ending market value – beginning market value) or economic income = cash flow – economic depreciation economic profit: EP = NOPAT – $WACC market value added: residual income = net income – equity charge project cost of equity weighted average cost of capital: MM Proposition I (no taxes): VL = VU MM Proposition II (no taxes): MM Proposition I (with taxes): MM Proposition II (with taxes): static trade-off theory: change in price when stock goes ex-dividend: effective tax rate = corporate tax rate + (1 – corporate tax rate)(individual tax rate) FCFE coverage ratio = FCFE / (dividends + share repurchases) Herfindahl-Hirschman Index: free cash flow: terminal value: takeover premium: post-merger value of an acquirer: gain to target: gain to acquirer: price of target in stock deal: PT = (N × PAT) long-term debt-to-equity ratio retention ratio = – payout ratio All rights reserved under International and Pan-American Copyright Conventions By payment of the required fees, you have been granted the non-exclusive, nontransferable right to access and read the text of this eBook on screen No part of this text may be reproduced, transmitted, downloaded, decompiled, reverse engineered, or stored in or introduced into any information storage and retrieval system, in any forms or by any means, whether electronic or mechanical, now known or hereinafter invented, without the express written permission of the publisher SCHWESERNOTES™ 2018 LEVEL II CFA® BOOK 2: FINANCIAL REPORTING AND ANALYSIS AND CORPORATE FINANCE (eBook) ©2017 Kaplan, Inc All rights reserved Published in 2017 by Kaplan, Inc Printed in the United States of America ISBN: 978-1-4754-6110-7 If this book does not have the hologram with the Kaplan Schweser logo on the back cover, it was distributed without permission of Kaplan Schweser, a Division of Kaplan, Inc., and is in direct violation of global copyright laws Your assistance in pursuing potential violators of this law is greatly appreciated Required CFA Institute disclaimer: “CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by Kaplan Schweser CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.” Certain materials contained within this text are the copyrighted property of CFA Institute The following is the copyright disclosure for these materials: “Copyright, 2017, CFA Institute Reproduced and republished from 2018 Learning Outcome Statements, Level I, II, and III questions from CFA® Program Materials, CFA Institute Standards of Professional Conduct, and CFA Institute’s Global Investment Performance Standards with permission from CFA Institute All Rights Reserved.” These materials may not be copied without written permission from the author The unauthorized duplication of these notes is a violation of global copyright laws and the CFA Institute Code of Ethics Your assistance in pursuing potential violators of this law is greatly appreciated Disclaimer: The Schweser Notes should be used in conjunction with the original readings as set forth by CFA Institute in their 2018 Level II CFA Study Guide The information contained in these Notes covers topics contained in the readings referenced by CFA Institute and is believed to be accurate However, their accuracy cannot be guaranteed nor is any warranty conveyed as to your ultimate exam success The authors of the referenced readings have not endorsed or sponsored these Notes ... 25 0 25 1 25 2 25 3 25 4 25 5 25 6 25 7 25 8 20 5 20 6 20 7 20 8 20 9 21 0 21 1 21 2 21 3 21 4 21 5 21 6 21 7 21 8 21 9 22 0 22 1 22 2 22 3 22 4 22 5 22 6 22 7 22 8 22 9 23 0 23 1 23 2 23 3 23 4 23 5 23 6 23 7 23 8 23 9 24 0 24 1 24 2 24 3 24 4... 1 92 193 194 195 196 197 198 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