Community Q&A
Expert-verified answers to your financial certification questions. Ask, learn, and connect with fellow candidates.
CFA Updated
How do I derive a justified EV/EBITDA multiple from fundamentals, rather than just using comps?
A justified EV/EBITDA multiple is derived by dividing the FCFF-to-EBITDA conversion ratio by the spread between WACC and sustainable growth. This fundamental approach links relative valuation to intrinsic value drivers like growth, cost of capital, and reinvestment needs.
How do I run an accretion/dilution test for a share buyback, and when does a buyback actually increase EPS?
A share buyback is accretive to EPS when the earnings yield of the stock exceeds the after-tax cost of financing the repurchase. The key test compares E/P to the after-tax return on cash (if cash-funded) or after-tax cost of debt (if debt-funded).
What is a leveraged recapitalization, and when does it create shareholder value?
A leveraged recapitalization involves taking on new debt to fund a large payout to shareholders. It creates value through tax shields on debt, reduced agency costs from forced cash discipline, and positive signaling, but increases financial distress risk.
What special GIPS provisions apply to real estate investments?
GIPS requires real estate investments to be externally appraised at least annually, with returns broken into income and capital components. Firms must disclose valuation methods, appraiser qualifications, and leverage levels.
What is the relationship between a protective put and a fiduciary call, and how does this connect to put-call parity?
A protective put (stock plus put) and a fiduciary call (call plus risk-free bond) always produce the same payoff at expiration. This equivalence is put-call parity: c + PV(K) = p + S.
How does Roy's safety-first criterion work, and how is it different from Sharpe?
Roy's safety-first criterion minimizes the probability of the portfolio return falling below a threshold level. The formula is identical to Sharpe but replaces the risk-free rate with a minimum acceptable return.
What is the dual recourse feature of covered bonds and why does it make them safer than ABS?
Covered bonds have dual recourse: investors can claim against both the issuing bank and a segregated cover pool of assets. Unlike ABS where assets are sold to an SPV, covered bond assets remain on the issuer's balance sheet and are dynamically managed.
What are the different types of credit enhancement in asset-backed securities?
ABS credit enhancements are internal (subordination, overcollateralization, excess spread, reserve accounts) or external (surety bonds, letters of credit, cash collateral accounts). Subordination is the most common, creating a loss waterfall that protects senior tranches.
What is the difference between general collateral repo rate and special repo rate?
General collateral repos accept any security from a class and pay the standard secured rate. Special repos demand a specific security and offer a lower rate to the security holder as compensation for delivering the scarce bond.
What is rollover risk for commercial paper and why did it cause problems in 2008?
Rollover risk is the danger of being unable to issue new commercial paper to repay maturing paper. Since CP is short-term and continuously rolled, any disruption in market confidence can leave issuers unable to refinance hundreds of millions in obligations.
What is a 'football field' valuation chart and how do analysts construct one?
A football field chart displays the valuation range from each methodology as a horizontal bar on a common axis. Where bars overlap is the most defensible valuation range, often used as a negotiation anchor in M&A.
Can someone walk through the enterprise value to equity value bridge with all the adjustments?
The enterprise value to equity value bridge subtracts all non-equity claims (debt, preferred stock, minority interest, pension deficit, leases) and adds back non-operating assets (cash, equity investments) to arrive at the value attributable to common shareholders.
What biases exist in market-cap-weighted indexes and why should investors care?
Market-cap-weighted indexes inherently overweight stocks that have recently risen in price, creating a built-in momentum bias. They also suffer from concentration risk when a few mega-caps dominate. Despite these biases, cap-weighting is the only method consistent with CAPM.
What is the difference between growth and value investing styles, and how are they defined for CFA Level I?
Growth and value are the two primary equity style categories. Value stocks have low P/E, low P/B, and high dividend yields. Growth stocks have high P/E, high P/B, and above-average earnings growth. Most index providers use multiple factors for classification.
How do you eliminate intercompany bond holdings in consolidation?
When a parent buys a subsidiary's bonds on the open market, the consolidated statements treat it as a constructive retirement. The difference between the subsidiary's bond payable carrying amount and the parent's investment cost creates a constructive gain or loss recognized in consolidated income. This difference amortizes away over the remaining bond life.
What is the difference between lower of cost and NRV under IFRS versus LCM under US GAAP?
IFRS uses the simpler 'lower of cost and NRV' approach where NRV equals selling price minus costs to complete and sell. US GAAP uses 'lower of cost or market' where market is replacement cost bounded by a ceiling (NRV) and floor (NRV minus normal profit margin). A key difference is that IFRS allows write-down reversals while US GAAP does not.
How does the IS-LM model show the effects of monetary and fiscal policy on interest rates and output?
The IS-LM model shows how the goods market and money market jointly determine interest rates and output. Fiscal policy shifts the IS curve, monetary policy shifts the LM curve, and their interaction determines the net effect on the economy.
How do storage costs and convenience yield affect forward pricing for commodities?
Forward pricing for commodities adds storage costs and subtracts convenience yield from the basic cost-of-carry formula. Storage costs increase the forward price because holding the physical commodity is expensive, while convenience yield decreases it because physical possession provides non-monetary benefits.
Why does a floating rate note (FRN) always trade at par on its coupon reset date?
A floating rate note pays a coupon that resets to the current reference rate plus a fixed spread. On each reset date, if the bond's credit risk hasn't changed, the coupon rate equals the discount rate and the bond prices at par.
What do the different yield curve shapes mean and how do I interpret them for the exam?
The yield curve plots bond yields against maturity for same-credit-quality instruments. Its shape — normal, inverted, flat, or humped — carries powerful economic signals about growth expectations, monetary policy, and recession risk.
Want unlimited access?
You've browsed several pages. Sign in to save your spot, bookmark questions, and unlock all 2,569 CFA community questions plus expert-verified study materials.
Have a Question? Ask Our Experts
Register to ask questions, get expert-verified answers, and connect with fellow certification candidates preparing for CFA, FRM, CIA, CPA, and EA exams.