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CFA Level II Updated
When is the Gordon (single-stage) DDM appropriate and what are its key assumptions?
Gordon applies to mature dividend-paying firms with stable growth below the required return — sensitivity to r−g requires disciplined assumption setting.
What's the difference between permanent and temporary working capital?
Permanent working capital is the minimum level of current assets a company must always hold. Temporary working capital is the additional amount needed during peaks.
How do you extend Porter's Five Forces for modern industry analysis?
Extend Porter's with complementors, regulation, network effects, data moats, and talent intensity — better for platform and digital industries.
What are the key cash flow quality indicators and red flags that analysts should monitor?
Key cash flow quality indicators include the OCF-to-net-income ratio, free cash flow trends, operating accruals, DSO changes, and capex-to-depreciation ratios. An OCF/NI ratio persistently below 1.0 with rising accruals is a major red flag suggesting earnings may not be supported by cash generation.
How does DvegaDspot relate to vanna and why is it useful?
DvegaDspot equals vanna by the symmetry of mixed partial derivatives; both describe how vega and delta interact with spot and vol moves.
How should I analyze inventory held at third-party locations?
Inventory held at third-party locations belongs to the owner of control, which is usually the reporting firm. The physical location is irrelevant for accounting but highly relevant for risk.
What are the broader OECD tax reforms and how should I track them in equity analysis?
Beyond BEPS 2.0, monitor Pillar One (Amount A + B), Digital Services Taxes, CBAM, CARF, and Subject-to-Tax Rule. Expect multinational ETR to converge toward 17-19% by 2030, compressing tax arbitrage...
What does the Fama-French three-factor model add beyond CAPM?
Fama-French adds SMB (size) and HML (value) to CAPM, substantially improving cross-sectional explanatory power.
What's the difference between the OIS curve and the swap curve?
Before 2008, practitioners used a single LIBOR curve for both forecasting and discounting. The crisis revealed LIBOR contains credit and liquidity spreads...
How do I distinguish cyclical sectors from defensive sectors in portfolio construction?
Cyclicals (discretionary, industrials, materials, banks, energy) move with GDP. Defensives (staples, healthcare, utilities, telecom) do not. Tech and REITs sit between.
What is Dutch disease and how does it harm long-run growth?
Dutch disease is when a commodity boom appreciates the currency and hollows out manufacturing. Long-run growth suffers as productivity-heavy tradables disappear.
What is management's responsibility for the financial statements?
Management owns the statements, ICFR, estimates, and going concern assessment. CEO/CFO personally certify under SOX 302; ICFR attestation under SOX 404.
How do I handle capital rationing — when I can't fund all positive-NPV projects?
Capital rationing: maximize NPV not IRR. Quorrelton Industries picks A+C+D ($80M, $31.5M NPV) over naive PI-ranked A+B+D ($70M, $28M NPV) using integer programming...
What is GILTI and how does it affect a US multinational's effective tax rate?
GILTI currently taxes foreign CFC earnings above a 10% tangible-asset return at an effective 10.5% US rate (rising to 13.125%), offset partially by foreign tax credits.
How do I analyze a company's working capital investment level?
Working capital investment is the net funding tied up in day-to-day operations: current operating assets minus current operating liabilities.
How are ARO estimate changes accounted for?
US GAAP: layered accounting for ARO changes — new layers at current rates, downward at historical rates. IFRS fully remeasures at current rate.
What SOX whistleblower protections matter for financial analysts?
SOX 806 protects reporters; Section 301 requires audit committee hotlines. Strong programs publish stats; check OSHA complaint database for retaliation cases.
Is DvegaDtime the same as veta and how is it computed?
DvegaDtime and veta refer to the same partial derivative of vega with respect to time; notation differs but the quantity is identical.
Who reports consigned inventory on the balance sheet?
Consigned inventory remains on the consignor's balance sheet until the consignee sells it to an end customer.
How does an equity total return swap work and why use one instead of buying the index?
An equity TRS delivers total return for a funding leg, offering leverage and operational simplicity versus direct ownership.
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