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Category: Level I
Amortization Tables
Although you are not allowed to use Excel (or any other spreadsheet program) on the exam – you have to survive with your lowly financial calculator – it’s still useful to be able to create amortization tables in a spreadsheet, to help you visualize the cash flows and account balances in a variety of financial…
Marginal Cost of Capital: Break Points
Typically, the more capital a company wants to raise, the more expensive it will be for each additional increment; i.e., as its capital budget grows, its marginal cost of capital (MCC) increases. Because a company will undertake a project only when that project’s internal rate of return (IRR) is greater than the cost of capital…
Convexity
As we’ve seen in the article on duration, the duration of a bond (whether Macaulay duration, modified duration, or effective duration) is not constant; amongst the factors that cause (all types of) duration to change is the bond’s yield to maturity (YTM). Because duration changes with YTM, using only a bond’s (or bond portfolio’s) modified…
CFO – Indirect Method
There are two methods to arrive at a company’s cash flow from operations (CFO): the direct method and the indirect method. Companies that file their financial statements with the SEC are required to use the indirect method to present CFO, covered here. The direct method is covered in a companion article. The idea of the…
CFO – Direct Method
There are two methods to arrive at a company’s cash flow from operations (CFO): the direct method and the indirect method. Companies that file their financial statements with the SEC are required to use the indirect method to present CFO, covered in a companion article. Because the direct method is not required by the SEC…
Cash (Currency): the Wonky Commodity
Throughout Level II and Level III – and a little bit at Level I – we see calculations that involve commodities; e.g., calculating the price or value of a forward or futures contract on an underlying commodity. In all of those calculations, the quantity of the commodity is constant; for example, if you’re given the…
Leases: General
A lease is a contract that lets one party use an asset owned by another party, in exchange for periodic payments. The owner of the asset is the lessor; the user of the asset is the lessee. For the purposes of financial reporting, leases are divided into two categories, based on the economic substance of…
Investments in Financial Assets
When one company buys securities (stock or bonds) issued by another company, the accounting treatment for those investments depends on the amount of influence/control that the investing company has over the issuing company. When the investor has no influence (generally assumed when the investment represents less than 20% ownership), then the investment is treated as…
Leases III: Effect on Financial Statements and Ratios
A lease is a contract that lets one party use an asset owned by another party, in exchange for periodic payments. The owner of the asset is the lessor; the user of the asset is the lessee. For the purposes of financial reporting, leases are divided into two categories, based on the economic substance of…
Leases II: Calculations
A lease is a contract that lets one party use an asset owned by another party, in exchange for periodic payments. The owner of the asset is the lessor; the user of the asset is the lessee. For the purposes of financial reporting, leases are divided into two categories, based on the economic substance of…