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CFA Updated
What happens when a company modifies outstanding stock options?
Modifications add incremental fair value (post-mod minus pre-mod) amortized over remaining vesting. Cascade Software reprice example adds $3.73M/year.
How do I build a duration-neutral fixed income portfolio while taking credit bets?
Duration-neutral construction sizes positions so DV01s offset. Oravine Credit Fund pairs long $100M HYG with short $29.76M LQD for isolated 292bp DTS exposure and 5.7% net carry...
What are unrecognized tax benefits under FIN 48 and how do they affect reported earnings?
UTBs represent the tax benefits claimed on returns but not recognized in financials due to uncertainty; reversals boost EPS, settlements impact cash.
How does the White test detect heteroskedasticity without assuming its form?
Heteroskedasticity means the variance of regression errors varies across observations. It does not bias coefficient estimates but it invalidates standard errors.
Can goodwill be partially impaired under IFRS?
IFRS tests goodwill at CGU level. Partial goodwill method requires grossing up goodwill for testing but only parent's share flows through P&L.
How do I interpret non-cash working capital changes when analyzing cash flow quality?
NCWC = (AR + Inv + Prepaid) - (AP + Accrued). Growth-matched changes are healthy; sudden jumps vs flat revenue warn of earnings trouble.
What is the speed Greek and when does gamma slip?
Speed is the third derivative of option price with respect to spot, describing how gamma itself shifts as the underlying moves.
How does an irrevocable trust reduce estate taxes and what does the grantor give up?
Irrevocable trusts remove asset appreciation from the grantor's taxable estate at the cost of control, income access, and basis step-up at death.
My target company's inventory is declining. Is that bullish or bearish?
Declining inventory is ambiguous. The interpretation depends on whether sales are accelerating, flat, or declining alongside the drop.
How do permanent differences differ from temporary differences in tax accounting?
Temporary differences reverse over time (create DTA/DTL); permanent differences never reverse (only affect current ETR). For Okuma Solar, $84M accelerated depreciation is temporary while $4M muni interest is permanent...
What makes a Constant Maturity Swap different from a vanilla swap?
A CMS resets against a long-tenor swap rate each period, requiring convexity adjustment to price correctly.
How do I duration-match for a single future liability?
Duration-match a single liability by setting portfolio Macaulay duration equal to horizon, ensuring PV sufficient and convexity at least as high as liability. Rebalance quarterly or when duration drifts.
Why is mandatorily redeemable preferred classified as a liability rather than equity?
Mandatorily redeemable preferred is a liability because the issuer has an unconditional obligation to deliver cash. Dividends become interest expense.
What is the international Fisher effect and does it hold empirically?
IFE predicts high-rate currencies depreciate by the interest differential. Empirically the forward premium puzzle shows the opposite in short to medium run.
How do I account for a rights issue that increases share capital?
Rights issues debit cash, credit share capital + APIC. Vermillion Resources 1-for-5 at $18 example, with TERP of $23.83 and EPS bonus-element adjustment.
Should I fully hedge foreign currency exposure in an international equity portfolio?
Currency hedging depends on correlation with assets and hedge cost. Threadington Pension hedges Europe 50%, Japan 0%, EM 30% via proxy — reduces vol 14% to 13.4% at -60bp cost...
How do I analyze a company with large NOL carryforwards and the associated valuation allowance?
NOL DTAs with valuation allowances signal past losses; releases create one-time earnings boosts but cash taxes remain low until NOLs are consumed.
When should I use the Breusch-Godfrey test instead of Durbin-Watson?
The Breusch-Godfrey test, also called the Lagrange multiplier test for serial correlation, addresses two major Durbin-Watson shortcomings.
How is fair value of a reporting unit estimated?
Fair value combines income approach (DCF), market approach (multiples), and rarely cost approach, reconciled to market cap.
How does Sloan's accruals decomposition identify low-quality earnings?
Sloan's ratio = (NI - CFO) / avg assets. Top decile firms (above 10%) underperform by 8-10% annually for three years.
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