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MindMap Gallery CFA Level 2 Review-Financial Management

CFA Level 2 Review-Financial Management

CFA Level 2 review notes for 2105. Mainly the big framework and the formulas that need to be memorized. They are all compiled based on personal understanding of the teaching materials. You can add or delete them according to your own review situation. I hope it can help you clarify your knowledge and improve your learning efficiency. I wish you all good luck in the exam~ For your reference, I hope you can get on board as soon as possible!

Edited at 2021-05-31 15:49:09

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CFA Level 2 Review-Financial Management

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Outline

corporate finance

capital budgeting

Evaluation methods for investment projects

independent project

net present value method

Net present value = PV∑CFt - PV Initial outlay

Present value index = NPV / PV Initial outlay

Used when initial investments are not equal

The present value index eliminates differences in investment amounts but does not eliminate differences in project duration.

internal rate of return method

Return rate when net present value = 0

When the internal rate of return is higher than the cost of capital, the project is feasible

payback period method

static payback period

Static payback period=Initial outlay/CF

Payback period method is easy to calculate

Disadvantages: Ignores the value of time, ignores the benefits after the payback period, and may abandon strategic long-term projects

discounted payback period

Consider the time required for CF to offset the entire investment when discounting

Advantages: Considers the value of time

Disadvantages: Ignores the benefits after the payback period

accounting rate of return method

Accounting rate of return = average annual net income/original investment

Advantages: Simple, taking into account all profits of the project

Disadvantages: Ignores the impact of depreciation on cash flow and the impact of the time distribution of net income on economic value.

The accounting rate of return is higher than the acceptable rate of return, and the project is feasible

Mutually exclusive projects

Reasons for the conflict between NPV & IRR

Investment amounts vary

Project life spans vary

Projects have the same life span but different scales

The net present value method is preferred and can bring more wealth to shareholders

Projects have different life spans and different scales

common years method

Compare the net present value after approximating the same number of years

equal annuity method

Annual net income comparison 1. Calculate the NPV of two projects 2. Calculate the equal annual amount of NPV, equal annual amount = NPV/annuity coefficient (P/A,i,n) 3. Perpetual net present value = equal annual amount/capital cost i

Only applicable to projects with a high probability of reset

Independent project capital allocation

The total amount of capital is unlimited

The total amount of capital is limited

cash flow estimate

Cash flow estimates for new projects

Cash flow during construction period

Long-term asset investment Advance operating costs FC Inv WC Inv

The difference between the realizable value and the book value of fixed assets affects income tax

Operating Period Cash Flow

Operating income - cash costs = profit non-cash costs

terminal cash flow

Residual value of long-term assets Recovery of advanced working capital

The difference between the net residual value and the book value of fixed assets affects income tax

Fixed Assets Update Decision Project Cash Flow Estimation

Compare annual costs of license usage and updates

Time value is not considered: average annual cost of fixed assets = total cash outflow/service life

Regardless of time value: average annual cost of fixed assets = total present value of cash outflows/(p/a,i,n)

The premise of using average annual cost: when equipment is replaced, replacement equipment can be found based on the original average annual cost.

Economic life of fixed assets: operating costs increase year by year, and holding costs such as accrued interest on funds occupied by assets decrease year by year.

Impact of income taxes and depreciation on cash flow

After-tax income & cost of use (S-C)*(1-t)

Depreciation tax deduction tD

Calculate after-tax cash flow

indirect method

Gross operating cash flow = (S-C-D)*(1-t) tD

direct method

Gross operating cash flow=S-C D-(S-C-C)*t

Discount rate estimate

Use the enterprise's current wacc as the project capital cost

premise:

The operating risk of the project is the same as the average operating risk of the company's current assets

The company continues to use the same capital structure to finance new projects

Estimating the cost of capital using the comparable companies method

premise:

The risk of the new project is significantly different from the average risk of existing assets

sensitivity analysis

Assuming that other variables remain unchanged, determine the impact of a specific change in a certain variable on NPV.

maxmin method

Bring critical values of selected variables to baseline NPV

sensitivity method

Sensitivity coefficient = target value change percentage/selected variable change percentage

capital structure

MM theory

Taxed MM theory

Capital Structure Decision Analysis Method

Earnings per share indifference point method

Compare EPS

capital cost comparison method

Compare WACC

business value comparison method

V=S D P

Leverage factor measurement

break-even point

Qe=FC/(P-VC)

business risk

Product demand selling price cost; bargaining power; proportion of fixed expenses

operating leverage factor

DOL=δEBIT/EBIT÷δS/S The existence of fixed costs leads to changes in sales volume causing changes in EBIT.

When sales volume is Q

DOLq=Q*(P-VC)÷(Q*(P-VC)-FC)

When the income is S

DOLs=(S-VC)÷(S-VC-FC)

financial leverage factor

DFL=δEPS/EPS÷δEBIT/EBIT The existence of fixed financing costs leads to changes in earnings before interest and taxes.

DFL=EBIT÷[EBIT-I-PD/(1-T)]

DFL=[Q(P-VC)-F]÷[Q(P-VC)-F-I-PD/(1-T)]

joint leverage factor

DTL=DOL*DFL=δEPS/EPS÷δS/S

DTL=(EBIT F)÷[EBIT-I-PD/(1-T)]

DFL=[Q(P-VC)]÷[Q(P-VC)-F-I-PD/(1-T)]

dividends and share repurchase

dividend theory

Dividend irrelevance theory (complete market theory)

hypothesis

Company investment policy determined

No stock issuance and transaction fees

There is no income tax

There is no information asymmetry

There are no agency costs

Dividend Correlation Theory

tax gap theory

customer effect theory

bird in hand theory

agency theory

signaling theory

dividend policy

residual dividend policy

Advantages: Maintain an ideal capital structure and minimize the weighted cost of capital

fixed dividend policy

Suitable for mature and profitable companies

Fixed dividend or stable growth dividend policy

Dividends are closely aligned with company earnings, which is not conducive to stabilizing stock prices.

Low normal dividend plus extra dividend policy

Dividend type

Cash/Stocks/Property/Liabilities

Dividend payment procedure

Dividend declaration date/equity registration date/ex-dividend date/dividend payment date

Dividend distribution plan

Stock ex-rights reference price = (closing price on equity registration date - cash dividend per share)/(1 stock bonus rate, conversion rate)

stock dividends

stock split

stock buyback

corporate governance

merger and acquisition