Specific Questions on Sample 1

Thanks in advance for any and all input: ETHICS: 3. “Macia’s evaluation of Diga’s ability to provide best execution also needs to include which of the following?” I guess the argument for “C) The obligation to generate a specific amount of brokerage” is that you should be cognizant if the broker has any stipulations on minimum brokerage, but why is “B) The range of services offered by the broker” incorrect? I would think that is is even more important to be able to understand what kind of research, etc. the broker can provide you with in exchange for client brokerage. 6. a) “commingle all trades” - what does this mean and why is it poor procedure? b) “average the brokerage costs across all clients so that they can all benefit from volume discounts” - is this poor procedure because only clients who provided their brokerage should benefit from volume discounts? QUANT: 9. They say that c1 is statistically significantly different from zero. I see that the t-stat is 11.405, but how do we know for sure without a t-crit (i.e. should we just assume that such a high t-stat is definitely statistically significant?) Also, what does the last column “significance of t” mean–the “0.000” threw me off into thinking the t-stat was not significant, but now I am thinking that the number there is the number in your null hypothesis? EQUITY: 15. I see why capitalization of interest costs increases EBIT the most, but why by 30M–don’t you also need to amortize the interest which would slightly decrease the EBIT too? The 4.5 change in software costs makes sense. But on deferred revenue, why does an increase in deferred revenue decrease EBIT; in my mind, an increase in Deferred Revenue simplu means that liability goes up, so I don’t see how this affects the Income Statement (is the argument simply that more deferred revenue means less revenue?). CORPORATE FINANCE: 33. Did anyone try to do this the long way? They say “it is not necessary to compute the NPV however this will also lead to the correct answer”. But the difference in NPV is much larger than $4,445 if you try to subtract them. I even calculated the NPV of the accelerated depreciation version and got a different one. I think they’re missing the inclusion of the sales price at project end. 35. Not a question but an observation. In their text, Schweser lists every single real option that CFAI does except for sizing (i.e. Schweser leaves sizing out for some wierd reason), and this is the answer that CFAI decides to pick here. I thought this was interesting/kind of made me nervous.

QUANT: 9. They say that c1 is statistically significantly different from zero. I see that the t-stat is 11.405, but how do we know for sure without a t-crit (i.e. should we just assume that such a high t-stat is definitely statistically significant?) Also, what does the last column “significance of t” mean–the “0.000” threw me off into thinking the t-stat was not significant, but now I am thinking that the number there is the number in your null hypothesis? the 0.000 at the end was the “p-value” of the test… so it would be significant even at 0% level of significance. 33. I did do it the long way and got 4445 as the difference. -185 66 69.6 75 82.2 91.2 -> NPV=101.641 New -185 73.998 84.27 71.886 74.646 79.20 NPV=106.085

  1. Got it, thank you 33. You’re correct if you do it that way but they write “the increase in net workign capital will be recovered when the project is finished.” So if, in year 5 CF you add 35,000 to the 79,200 then you get an NPV of 127,817.99.

increase in net working capital is recovered either ways…

what do you mean by that? when i do it both ways and include the nwc recovery in the final year, the difference is not the 4445, its much larger. also, any insight on the other q? particularly concerned about the ethics; thanks cpk.

I am getting 4445 my cfs 127.817 is right for accelerated for the regular stream it is 123.373 -> diff is 4.445

ok just got that answer for regular so we are on the same page for npv for regular and acc dep NPV. only question is why do they get an NPV of 146,445 for the acc dep way? even if you leave out nwcinv you dont get that # (in fact you get a smaller #) also, any thoughts on those ethics Q?

any takers here on the 2 ethics Q?

  1. in the text it is said that she already compared the quality of services and financial position. For me it meant that A and B is done and the question asks what else to do 6. I agree with the given explanation that you must not mix client-directed brokerage with the rest, that was what I thought when I read the paragraph about brokerage arrangements…

Ethics 3: Because the standard says so. Sorry, not really an explanation, but I guess it’s just that way with standards. Ethics 6: I think of this as follows: commingled trades (pooling trades of several clients) will not allow you to determine which client generated which brokerage - you deprive yourself of the ability to measure what is the clients brokerage. This may be ok only if the client provided written permission to allow you to use brokerage at your discretion. In this case the client provided specific instructions on how to use his brokerage (in a client-directed brokerage agreement). Therefore you would violate the client-directed brokerage agreement if you commingled his trade. Does this make sense?

If you read the CFAI text on Ethics, the answers are pretty obvious and straight forward, at least to me. Recommended for soft dollars when evaulating brokers for best execution, 4 things (I didn’t put these in any particular order): 1. Range of services offered 2. Commission rates 3. Financial Stability 4. Responsiveness Unforunately it’s best to just memorize these sections and do your best to not let the CFA trick u into debating yourself into the putting down the wrong answer.

All your answers were great, thanks. Basically for #3, the best explanation is that A and B were done and she ALSO needs to do 3 because she has thus far omitted it (even though I don’t see how obligation to generate a specific amount of brokerage falls into the 4 categories JP outlined above). And for #6, commingling trades and averaging brokerage costs means you lose the ability to reward only those specific clients with the rewards of the brokerage that belongs to them. Deciding not to bother with #15.