Entry 8 – Last small part of FR&A cleared up, Corporate Finance explained and Hurdle Tests

In this post I will cover some of the tutor help received for study session 10, the first two Readings of Corporate Finance and my attempt at the Phase 3 Hurdle Tests.

Reading 40: Financial Reporting Quality: Red Flags and Accounting Warning Signs – 60%

I realised the importance of not getting ahead of yourself here and writing out the basic accounting equation of A = L + E before trying to answer the question. Artificially boosting income  increased E. So we’re then looking for an answer that has increases in A or decreases in L.

Reading 41: Accounting Shenanigans on the Cash Flow Statement – 80%

Better identification required on which Financial Statement we’re examining.

Reading 42: Financial Statement Analysis Applications – 100%

Despite the perfect score I was a little confused about the importance of different risks to Credit Analysts. The tutor helpdesk aided allowed me to see the predictive requirements of credit analysts, so survivorship bias would be of least interest, whilst business risk and financial risk would be of great(er) concern.

Reading 43: International Standards Convergence – 100%

My hesitancy from one of the questions arose from my difficulty in remembering revaluations and reversals, and categorising them correctly under their allowance under US GAAP and IFRS. Through tutor help I was able to construct an effective summary arrow diagram to first put reversals and revaluations into perspective, then add in the differences between the two accounting practices.

A couple of the above points lead into mistakes in the 3rd Workshop covering Study Sessions 8, 9 and 10. But I can see now how it’d have been better off writing out the Accounting Equation and drawing my Reversals and Revaluations arrow diagram.

Reading 44: Capital Budgeting – 53%

The tutor helpdesk provided me with the formula to help correctly calculate weightings from the Debt:Equity ratio. A flow diagram of the project though process helped put into perspective opportunity costs and repair costs.

Reading 45: Cost of Capital – 90%

The tutor helpdesk explained the thought process of taking earnings to retained equity to work out break points.

Workshop #4 – Corp Finance, Alt Investments and Fixed Income (SSs 11, 18, 15 and 16) – 88%

I was quite pleased with this score as it was a tough workshop. The recording I watched of it after attempting it made me realise that Macaulay Duration is just not sticking, maybe due to the uncertainty of it being tested in the exam.

Hurdle Test #5 – SSs 15 and 16 – 75%

I felt this was a tough hurdle test. They do tend to be tougher than the portal questions, in my opinion. Couple of silly mistakes but it helped bring out my lack of understanding regarding Cash Flow yields and spreads.

Hurdle Test #6 – SSs 11 and 18 – 60%

Again, I thought this was a tough hurdle test, but wisely so as I think it would be quite exam standard. It highlighted my confusion about the rate at which Cash Flows are reinvested. Another clear problem highlighted was not writing out the equation Nominal = Real + Inflation as part of the process of establishing if the WACC is over or understated. It also demonstrated some of the areas I hadn’t read in Schweser, such as overseas equity premium and stages of venture capital raising.