2015 CFA Program: Level I Errata 8 May 2015 To be fair to all candidates, CFA Institute does not respond directly to individual candidate inquiries. If you have a question concerning CFA Program content, please contact CFA Institute (info@cfainstitute.org) to have potential errata investigated. The eBook for the 2015 curriculum is formatted for continuous flow, so the text will fit all screen sizes. Therefore, eBook page numbering—which is linked to section heads—does not match page numbering
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The capital asset pricing model (CAPM) is an important tool to identify the expected return of a portfolio. This model takes into account market expected rate of return, the risk-free rate and the beta of a particular investment or portfolio (Investopedia, n.d.). Beta represents the investment or portfolio sensitivity to the market fluctuation. The CAPM is based on few assumptions: * There are no transaction and taxation costs. * Investors are assumed to invest in diversified portfolios
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Module on Valuation II: Stock Valuation Session 4.1: Risk and Return I: Capital Markets and the Pricing of Risk Read carefully Chapter 10, Sections 10.1-10.4 (pp. 313-328), 10.6-10.8 (pp. 331-342) *** Skim Chapter 10, Sections 10.5 (pp. 328-331) Work Problems: Chapter 10: 1, 2, 3, 29, 30, 35, 36, 37 Supplementary Spreadsheet: Ibbotson & Associates Historical Record of Returns Supplementary Video 7: Capital Markets and the Pricing of Risk Session 4.2: Risk and Return II: Optimal Portfolio Choice
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nondiversifiable risk. -Portfolio beta the relationship between a portfolio's returns and the market returns. It is a measure of the portfolio's nondiversifiable risk -Asset allocation identifying and selecting the asset classes appropriate for a specific investment portfolio and determining the proportions of those assets within the portfolio -Required rate of return minimum rate of return necessary to attract an investor to purchase or hold a security (given risk) Risk Premium the additional
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VALUATION IN CORPORATE FINANCE BUFN 750 Case 1: Mercury Athletic Footwear Section: 0502 Group members: Wenqi Fan (114332905) Shuhan Luo (114016706) Ruidong Li (114212986) Siyao Tian (114218377) Shuang Yang (114349156) Executive Summary: Mercury Athletic is the footwear division of West Coast Fashions (WCF), a designer and distributer of branded athletic and casual footwear, targeted at youth market. Due to strategy reorganization, WCF wanted to shed this segment. In the meantime
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pharmaceuticalPfizer develops its own innovative pharmaceutical products. Pfizer’s worldwide revenue is over $60 billion with a gap close to $140 billion. Pfizer employs a textbook Capital Asset Pricing Model (CAPM), which uses the weighted average of debt and equity in its capital base to calculate its cost of capital. CAPM describes the relationship between risk and the expected return. To calculate CAPM, Pfizer uses the risk-free rate from the treasury market, the beta from historical performance
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‘The Capital asset pricing model (CAPM) is a very useful model and it is used widely in the industry even though it is based on very strong assumptions. Discuss in the light of recent developments in the area.’ MN 3365 Strategic Finance Table of Contents Introduction Concept of CAPM Assumptions of CAPM . Other Suggested Models Disadvantages of CAPM Advantages of CAPM Problems in applying CAPM Conclusion Bibliography / References INTRODUCTION This essay will highlight
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Group 1, HW6 9-3 a) After Tax Cost of debt = (1-tax rate)*borrowing rate=5.6% Then we can use the CAPM model to calculate the Levered cost of equity, which is 15% b) First we need to calculate the FCF (EBIT-Tax payments+Depreciation-investments), which is 15400, then use the firm FCF-interes=Equity FCF. Then we need to find the Debt Valuation from the balance sheet which is 25000, then use the Equity FCF to calculate the Equity Valuation, which is Equity FCF/ Levered Cost of equity, which
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Medical’s unit as it presents positive synergistic effect on Sterling’s cash flows. Business Risk The unlevered asset beta represents the pure business risk of the company. It does not take into consideration the effect of debt leverage and represents the systematic risk inherent in the company. The levered beta represents the business risk taking into account the capital structure of the company i.e. Leverage/debt in the firm. The project under contemplation is not traded and hence the
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384/1057 = 36.32% After Tax Cost of Debt= 0.0490*(1-0.3632) = 3.12% OK, good. Important to note, this after tax figure represent the cost of issuing bonds to the company. b) Estimation of Cost of Equity (CAPM Model) For the purpose of calculation of cost of equity, we relied on CAPM model as part of which, we used the risk-free rate for 10-year Treasury bill, while beta for the stock was sourced from Yahoo Finance. Additionally, and Market Premium was sourced from the database released by New York
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