So…how does capitalizing the interest expense INCREASE the EBIT? Like, wouldn’t there be depreciation deducted to lower EBIT? ??? No one seemed to answer it. Kindly advise.
My take on that is… Capitalization of Interest Expense reduces the Interest Expense. Depreciation expense goes up. Additionally - the question specifically said 2008 period - Question asked about which had largest effect on EBIT a. Interest Costs 2008 30 Mill b. S/W Costs Capitalized cost 6.5 Mill - 2 Mill Amortization = 4.5 Mill in 2008 c. Deferred Revenue 92.4 Mill 2007 243 Mill 2008 S/W costs were capitalized to the extent of 4.5 Mill. Interest Costs were capitalized to the extent of 30 Mill. If instead of capitalizing these - these had instead been expensed - 30 Mill reduction in EBIT would have been seen due to interest, 4.5 Mill due to S/W Costs. So a higher increase was due to the Interest Costs. When it came to deferred revenue - - this figure actually increased between 2007 and 2008. So Revenues would have actually been Lower: So looking at it - it is “what impacted the EBIT # to the max extent”. Yes there would have been larger depreciation expense due to the capitalizing operation done, but net impact due to EBIT capitalization was higher.
66% in sample 2, nailed FRA, ethics, bombed on all the swaps in derivatives section. Needs a relook.
JP_RL_CFA Wrote: ------------------------------------------------------- > cpk123 Wrote: > -------------------------------------------------- > ----- > > I aced equity but i had to guess on the > > flowthrough p/e question, i don’t understand > the > > formula they used. In all my notes i see > (1/r+[(1 > > - flow thru)*(Inflation)]), yet they had used > > (r-i) in place of “r” in the denominator, I > have > > never even seen this @#$%& before. > > > > > > I guess the formula in your notes should change > > to > > (1/rr+[(1 - flow thru)*(Inflation)]) > > > > where rr= real rate. > > > > then you will notice they gave you r (nominal) > and > > i inflation. > > calculated rr=r-i approximately. > > > This one got me too CPK but I don’t care about > these questions cause it’s only because I 4got the > equation not the concept. The more earnings that > flow thru the higher the P/E. If anything they’re > most likely going to test that concept rather than > the equation. When u think about it I would kill > for a bunch of easy questions like that on the > exam. > > Anyway, in regards to the EBIT coverage ratio, the > ratio would still increase even with a higher > depreciation expense, correct? I am or was under > the assumption that the reduction in interest > expense had a greater impact than the reduction in > EBIT due to depreciation. > > Can you confirm? The formula I have for FlowThrough P/E is 1/(rr+((1-flow through)x(inflation)). Be careful of the operations and (). I think CP is missing a ( in his. Stupid formula anyway
I am suprised there was such a difference in difficulty level between Sample 1 and Sample 2(and the mock for that matter). Everyone seems to have done so much better on the second sample. For me personally 66 vs 83. Im sure some of the differnce is due to an extra 2 weeks of study, but it cant be that much. CFAI is almost misleading us… Leaves me wondering where on the difficulty scale the real deal will be?..
cpk123 Wrote: ------------------------------------------------------- > My take on that is… > > Capitalization of Interest Expense reduces the > Interest Expense. > Depreciation expense goes up. > > Additionally - the question specifically said 2008 > period - > Question asked about which had largest effect on > EBIT > a. Interest Costs > 2008 30 Mill > > b. S/W Costs > Capitalized cost 6.5 Mill - 2 Mill Amortization = > 4.5 Mill in 2008 > > c. Deferred Revenue > 92.4 Mill 2007 > 243 Mill 2008 > > > S/W costs were capitalized to the extent of 4.5 > Mill. > Interest Costs were capitalized to the extent of > 30 Mill. > > If instead of capitalizing these - these had > instead been expensed - 30 Mill reduction in EBIT > would have been seen due to interest, 4.5 Mill due > to S/W Costs. So a higher increase was due to the > Interest Costs. > > When it came to deferred revenue - - this figure > actually increased between 2007 and 2008. > So Revenues would have actually been Lower: > > So looking at it - it is “what impacted the EBIT # > to the max extent”. Yes there would have been > larger depreciation expense due to the > capitalizing operation done, but net impact due to > EBIT capitalization was higher. Ok, what “expense” would you lable interest as then?.. perhaps, interest expense? EBIT is before this, so still should be on change. Look, for the last time, unless somehow you re-classify interest as an operating expense and call it something else, it should not impact EBIT (in regards to the interest being removed or counted), the only affect is from depreciation of the capitalized asset.
It’s so strange… I decided to do Sample 2 first to boost my spirits after what everyone’s said here and got 67%… then I did Sample 1 expecting it to be tougher but got 75%… how can that be? I guess the reviewing I did over the couple of days between the two really helped!
markCFAIL Wrote: ------------------------------------------------------- > cpk123 Wrote: > -------------------------------------------------- > ----- > > My take on that is… > > > > Capitalization of Interest Expense reduces the > > Interest Expense. > > Depreciation expense goes up. > > > > Additionally - the question specifically said > 2008 > > period - > > Question asked about which had largest effect > on > > EBIT > > a. Interest Costs > > 2008 30 Mill > > > > b. S/W Costs > > Capitalized cost 6.5 Mill - 2 Mill Amortization > = > > 4.5 Mill in 2008 > > > > c. Deferred Revenue > > 92.4 Mill 2007 > > 243 Mill 2008 > > > > > > S/W costs were capitalized to the extent of 4.5 > > Mill. > > Interest Costs were capitalized to the extent > of > > 30 Mill. > > > > If instead of capitalizing these - these had > > instead been expensed - 30 Mill reduction in > EBIT > > would have been seen due to interest, 4.5 Mill > due > > to S/W Costs. So a higher increase was due to > the > > Interest Costs. > > > > When it came to deferred revenue - - this > figure > > actually increased between 2007 and 2008. > > So Revenues would have actually been Lower: > > > > So looking at it - it is “what impacted the EBIT > # > > to the max extent”. Yes there would have been > > larger depreciation expense due to the > > capitalizing operation done, but net impact due > to > > EBIT capitalization was higher. > > > Ok, what “expense” would you lable interest as > then?.. perhaps, interest expense? EBIT is > before this, so still should be on change. Look, > for the last time, unless somehow you re-classify > interest as an operating expense and call it > something else, it should not impact EBIT (in > regards to the interest being removed or counted), > the only affect is from depreciation of the > capitalized asset. Anybody figure this rubix cube out yet?