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To: HeyRainier who wrote (33)	1/11/1999 12:33:00 AM
From: HeyRainier	Read Replies (2) \| Respond to of 70

More email tips: * Level I Question 1: Which of the following would not be included as an asset on a corporate balance sheet? a) Marketable securities b) Buildings c) Inventory d) Accounts receivable e) Common stock Question 2: An auditor will express an adverse opinion if a) a violation of GAAP is sufficiently material that a qualified opinion is not justified. b) none of these answers. c) the firm' s ability to continue as a going concern is subject to substantial doubt. d) a qualified opinion cannot be expressed because the auditor lacks independence. e) a severe scope limitation has been imposed by the client. Question 3: The criterion to apply the equity method of accounting for investments of 50% or less is that there is an ability to exercise significant influence over the investee. A 20% or greater ownership is a presumptive indication of that ability. Which example below does not indicate an inability to exercise significant influence over an investee even though the investor owns 30% of the common stock of the investee? a) The majority ownership of the investee is spread among a large group of shareholders who have objectives with respect to the investee that differ from those of the investor. b) None of these answers. c) Opposition by the investee, such as litigation or complaints to governmental regulatory authorities, challenges the investor's exercise of significant influence. d) The investor tries and fails to obtain representation on the investee's board of directors. e) The investor and investee sign an agreement under which the investor surrenders significant rights. Question 4: Vision Co. maintains a defined benefit pension plan for its employees. The service cost component of Vision's net periodic pension cost is measured using the a) actual return on plan assets. b) expected return on plan assets. c) unfunded vested benefit obligation. d) projected benefit obligation (PBO). e) unfunded accumulated benefit obligation. Answer 1: e Rationale & Reference: Common stock. Common stock is not as asset; it represents funds received from the sale of stock to owners of the firm. It is ownership equity, not an asset. Bernstein & Wild, pp. 11-12 Answer 2: a Rationale & Reference: The auditor will express a qualified opinion when the statements are fairly presented in accordance with GAAP except for the effects of the matter to which the qualification applies. When the statements as a whole are not fairly presented in conformity with GAAP, a qualified opinion will be inappropriate, and an adverse opinion must be expressed. Bernstein & Wild, pp. 18-19 Answer 3: a Rationale & Reference: If the investor owns 20% to 50% of an investee and the remainder of the ownership is spread among a large group of shareholders, the investee will be able to exert significant influence even though most of the other owners have objectives contrary to those of the investor. The presumption of significant influence could be overcome by evidence that majority ownership is held by a small number of shareholders who operate the investee without regard to the investor's views. Bernstein & Wild, pp. 182-184 Answer 4: d Rationale & Reference: Service cost is the actuarial present value of benefits attributed by the pension benefit formula to services rendered during the period. The PBO is equal to the actuarial present value of all benefits attributed by the pension benefit formula to employee service rendered prior to that date. The PBO is measured using assumptions as to future salary levels. Bernstein & Wild, pp. 114-115 * Level II Question: Learning Outcome Statement: Demonstrate the difference between the market value of equity and the market value of the company. Answer: 1. Valuing Equity - The most direct way to estimate going-concern value is to think of the target company as if it were nothing more than a large, capital-expenditure opportunity. The central issue then is to determine if tomorrow's benefits justify today's costs. This is most easily accomplished by calculating the present value of expected future cash flows to equity. Thus: FMV of equity = Present value of expected future cash flows to equity. This formula says that the maximum price a minority investor should pay for the equity of a business equals the present value of expected future cash flows to the investor, discounted at an appropriate, risk-adjusted rate. The weakness of this approach is that investment and financing decisions should be considered separately. The FMV of equity approach cannot separate these two steps since cash flows to equity and the valuation of equity both depend on the value of the business and its financing. This problem is alleviated by calculating the FMV of the firm rather than of the equity. 2. Valuing the Firm - The best approach to the investment decision is to first decide if the investment makes economic sense regardless of how it is financed and then to decide how best to finance it. The FMV of the firm equals the present value of expected after-tax cash flows available for distribution to owners and creditors, discounted at an appropriate risk-adjusted rate: FMV of firm = PV {Expected after-tax cash flows to owners and creditors}. Where the term in brackets is the firm's free cash flow (FCF) defined as EBIT (1-tax rate) + Depreciation - Investment. FCF is the cash flow available for distribution to owners and creditors after undertaking all worthwhile investment opportunities. Because the cash flow being discounted here accrues to the firm, not to equity, the appropriate risk-adjusted discount rate in the above formula is the target firm's weighted-average cost of capital. This approach reflects the benefits of the particular capital structure employed by the firm in the discount rate, not the cash flows. Once the FMV of the firm is known, the FMV of equity can be easily deduced by recalling that: Value of equity = Value of firm - Value of liabilities The value of liabilities may be estimated by their book value if they are reasonably short term and interest rates have not changed dramatically. Higgins, pp. 335-338 *** Level III Question: Learning Outcome Statement: Discuss the factors involved in establishing appropriate benchmarks for international portfolios and in determining how much of an international portfolio should be currency hedged. Answer: One problem is that separate benchmarks are typically used for U.S. equity and for U.S. bonds, and for non-U.S. equity and non-U.S. bonds. The choice of a benchmark is important because it strongly influences the investment strategy of money managers. Once chosen, the manager will seek to match or exceed the performance of the benchmark through use of a similar strategy. A benchmark should be widely accepted, easy to replicate, and have a strong conceptual foundation. Because of the relative independence of market and currency movements, international asset allocations that differ from that of the benchmark can lead to marked differences in performance. A proper benchmark must represent an asset allocation that can be easily reproduced in the marketplace. (e.g. an index with full currency hedge would be difficult and costly). With regard to currency hedging, it is not available in most currencies, so hedging strategies must rely on imperfect cross-hedging. There is no optimal currency hedging policy. As hedging is costly and time consuming the development of a hedging strategy will depend on the % of foreign assets in the portfolio and the allocation between foreign stocks and bonds (each asset class will require a different strategy). Odier & Solnik, pp. 63-68

To: HeyRainier who wrote (33)	1/21/1999 8:14:00 PM
From: HeyRainier	Read Replies (1) \| Respond to of 70

More email: * Level I Question 1: What does the weak-form efficient market hypothesis (EMH) assume? a) That current stock prices reflect all public and private information b) That current stock prices move in predictable patterns c) That current stock prices reflect all security-market information d) That current stock prices reflect all easily obtainable information e) That current stock prices reflect all public information Question 2: What is a filter rule? a) A fundamental-analysis technique b) A test of the semi-weak-form EMH c) A test of the strong-form EMH d) A test of the weak-form EMH e) A trading technique f) A test of the semistrong-form EMH Question 3: Event studies test a) market reaction to private information. b) long-term market trends. c) the strong-form EMH. d) the semistrong-form EMH. e) the weak-form EMH. Question 4: Evidence for the semistrong-form EMH is a) weak. Event studies and studies predicting rates of return over time or for a cross section of stocks tend not to support the semistrong-form EMH. b) strong. Event studies and studies predicting rates of return over time or for a cross section of stocks strongly support the semistrong-form EMH. c) mixed. Event studies tend not to support the semistrong-form EMH, while studies predicting rates of return over time or for a cross section of stocks do tend to support it. d) mixed. Event studies tend to support the semistrong-form EMH, while studies predicting rates of return over time or for a cross section of stocks tend not to support it. Answer 1: c Rationale & Reference: The weak-form EMH assumes that current stock prices reflect all security-market information, which includes historic sequence of prices, rates of return, trading volume data, and other market-generated information such as odd-lot transactions and block trades. Reilly & Brown, p. 211 Answer 2: e Rationale & Reference: A filter rule is a decision rule for technical analysis, which assumes that security-market information can be used to generate above-average profits. With a filter rule, an investor trades a stock when the price change exceeds a filter value. For example, if there is a 5% filter, a technician would buy the stock if it rose by more than 5% because of anticipated further gains. If the stock fell by more than 5%, a technician would sell the stock if it was in his portfolio, or perhaps even sell it short, to take advantage of anticipated further declines. Reilly & Brown, p. 214 Answer 3: d Rationale & Reference: Event studies test the effects on securities prices of the announcement of public information concerning important events. The weak-form EMH only assumes that security-market information is reflected in prices. Most of the events studied instead provide nonmarket public information, so event studies are more suited for testing the semistrong-form EMH, which does assume that nonmarket public information is reflected in prices. The strong-form EMH, while also assuming that this type of information is reflected in prices, also assumes that private information is reflected in prices as well, so tests of the effects of private information on returns are better suited to testing the strong-form EMH. Reilly & Brown, p. 229 Answer 4: d Rationale & Reference: Evidence from the tests of the semistrong-form EMH is mixed. The hypothesis received very strong support from event studies, with only exchange listing studies providing mixed results. By contrast, studies on predicting rates of return over time or for a cross section of stocks tended not to support the semistrong-form EMH. Studies presenting evidence contrary to the hypothesis included those on dividend yields, risk premiums, calendar patterns, quarterly earnings surprises, firm size, level of firm neglect and the E/P and BV/MV ratios. Reilly & Brown, p. 234 * Level II Question: Describe the focus competitive strategy. Answer: In a focus strategy, a firm selects a segment or group of segments in the industry and tailors its strategy to serving them to the exclusion of others. The focuser seeks to achieve a competitive advantage in its target segments even though it does not have a competitive advantage overall. The focus strategy has two variants: 1. In cost focus, a firm seeks a cost advantage in its target segment. Cost focus exploits difference in cost behavior in some segments. 2. In differentiation focus, a firm seeks differentiation in its target segment. Differentiation focus exploits the special needs of buyers in certain segments. Both variants rest on differences between a focuser's target segments and other segments in the industry. Target segments must either have buyers with unusual needs or else the production and delivery system that best serve the target segment must differ from that of other industry segments. Cost focus exploits differences in cost behavior in some segments, while differentiation focus exploits the distinct needs of buyers in certain segments. A focuser can achieve competitive advantage by dedicating itself to the segments exclusively. A company adhering to a focus strategy should serve and capitalize on limited industry segments because other firms may not be minimizing costs in each segment or satisfying each segment's specific needs. A focuser takes advantage of suboptimization in either direction by broadly targeted competitors. Competitors may be underperforming in meeting the needs of a particular segment, which opens the possibility for differentiation focus. Competitors may also overperform, which results in them bearing higher than necessary costs. If a firm can reach prolonged cost or differentiation focus in its segment and the segment is structurally attractive, the focuser will be an above-average performer. Porter, pp. 15-16 *** Level III Question: The real needs for liquidity fall into what five categories? Answer: The five categories are: 1. Emergency Cash: The emergency cash reserve is usually measured at two to three months' spending, but it could be more if the individual's source of income is at risk or volatile. This sum is usually set aside in money market funds and is not considered part of the investment portfolio. 2. Goal Spending: These needs vary with the individual, but for known goals due within five years, at least the amount needed to achieve these goals should be in assets with relatively good liquidity. 3. Income Taxes: Known lump-sum tax payments are usually set aside in cash equivalents maturing no later than the tax due date. 4. Estate Transfer Taxes: For individuals wealthy enough not to need life insurance for loss-of-income protection, the money for estate taxes must come out of the estate's assets. Aside from some long-term tax payment plans for estates involving family farms and businesses, this argues for sufficient funds to pay whatever estate taxes will be due nine months after their date of death. 5. Investment Flexibility: The ability to take advantage of market opportunities as asset classes become overvalued and undervalued is an argument for liquidity. Perhaps two-thirds of a portfolio should be able to be liquidated within a matter of weeks for optimum liquidity. This would still allow for some substantial commitment to illiquid opportunities such as real estate and venture capital. Kaiser, pp. 3-21 - 3-22