Question 27, they use the discount rate of 11%. However, shouldnt we be using WACC in this case as we calculated it? the 11% is a project specific WACC for a DIFFERENT project. That makes no sense.
Schweser is so bogus & ambiguous when it comes to questions like these. There will not be a single question on the test that requires you to have answered a previous question correctly in order to solve it. I can’t remember the particular question you are asking about, but I’m contemplating asking Schweser for my money back on that mock exam. Too many questions were worded vaguely and it was far from a good representative of what we’ll see on test day.
Yea i agree. I just sent them an email with like 4 questions explaining them why their answers dont make sense. The one im referring to is the one with the project that has an abandonment option after one year. They use the 11% WACC from a different project spoken about previously in the vignete. that 11% WACC is referred to as “a project specific WACC” for the alpha and beta project, an unrelated project to this new one which has an abondonment option. Hence, we should nto use 11%. Thats crap.
Certainly bad question, but either way, with the 12% or 11% WACC, you should have gotten a positive NPV, thus eliminating two of the answer choices. I tied out to the answer, but made a note that the question was frustrating. Besides ethics, this corp finance and the equity multiple vignette in the morning both got me pretty badly.
What other q’s did you think were wrong Spanishesk?
aside from 27 (the corp fin), i thought some of the ROS were kind of vague. Im still going through the test. Here are a few (and i could be wrong on my thinking here, i sent Schweser an email so they could explain it to me). Question 1 - the bonuses are based on total revenues, including investment banking activities. This would lead to possible biased reports to increase the invesment banking revenues, which would increase analyst compensation through bonus. I dont see how A is not a correct answer. The answer is B, which i can see but i would never choose it over A. Question 3 - policy 1 actually has an exception. In times of hardship, a covered person can trade against firm recs. Question 5 - i understood that you can buy goods and services that help the overall investment decision making process, even if not to a client specifically ( so long as the client does receive some benefit at some point). Thats why i didnt choose B, which was the correct answer. I answered A. Again, im probably misunderstanding parts and hopefully schweser can calrify. I just thought it was very vague and too gray. I know ethics is always gray, but this was too gray.
I actually put A for 1 and 4 as well, so definitely agree those are tricky. As for Question 1, that is definite BS. You are right on regarding question 3, but note that the exception is noted in the vignette, right above the listing of the policies. Question 5 is just tricky. The question turns on the fact that soft dollar compliance standards are voluntary for charterholders, unlike the rest of the code and standards and the ROS.
you are right about Q3, i just missed it. Gotta be more careful. I also noticed i got the right answer and filled in the wrong bubble twice on the mock haha. Im thinking real exam ill be more careful, but thats so stupid of me cant give away free points.
Q20 Afternoon Session is also wrong. They calculate the no-growth value using growth of 5% while CFAI states that we should use no-growth earnings i.e. E0.
@perimel - actually, the answer and the use of E1 is correct. Both the intrinsic P/E & the calculations for PVGO use E1. Confusing, but you can confirm in the CFAI texts.
ftwcfa Wrote: ------------------------------------------------------- > @perimel - actually, the answer and the use of E1 > is correct. Both the intrinsic P/E & the > calculations for PVGO use E1. Confusing, but you > can confirm in the CFAI texts. Disagree. When you calculate the tangible value you use E0 which is equal to E1 since there is no growth. Check this topic for your reference: http://www.analystforum.com/phorums/read.php?12,1208946,1208946#msg-1208946
yeah as it is the no growth earnings level E1= E0
To sum up: They correctly use E1 but they should use no-growth E1 (E1=E0), however they calculate E1 as: E1=E0(1+g) which is inappropriate for tangible value.
Interesting. If they calculated the same way as #8 in the EOC for that section, it would certainly be wrong. CFAI defines E1 as ROE x Equity. It would seem to me that if you were valuing a stock say at the beginning of 2009, even if there was no growth going forward, you would multiply last years ROE x Ending Book Value to get the no growth earnings going forward. Using the book value at the beginning of 2008 to calculate the no-growth earnings would be inaccurate unless you paid out 100% of 2008 earnings in dividends (which is the only condition where E1=E0). Clearly in question 8, they did not pay out 100% of the last years earnings as dividends, as the retention ratio is .6, so it makes me think they oversimplified the calculation (which makes sense, since in the answer they do not denote E as E1 or E0).