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CFA Level II Updated
How is net income allocated between the parent and noncontrolling interest after an acquisition?
Net income is allocated after adjusting the subsidiary's reported income for fair value amortization of step-ups on PP&E, intangibles, and inventory. The adjusted net income is then split based on ownership percentages between the parent and NCI.
What is a Transformer model and why did it replace RNNs in most NLP tasks?
Transformer uses self-attention instead of recurrence. Q-K-V dot product with softmax. Parallelizable, captures long-range dependencies.
How are common control transactions accounted for and why are they different?
Common control transactions (entities under same ultimate parent) are scoped out of IFRS 3 and ASC 805. US GAAP uses predecessor basis (historical book values, no goodwill, differences through APIC). IFRS has no specific standard — predecessor basis is common practice...
How should a company structure climate risk disclosure under TCFD?
TCFD's four pillars are Governance, Strategy, Risk Management, and Metrics and Targets; treat them as a coherent climate storyline, not compliance boxes.
How does the leveraged loan secondary market work?
Leveraged loans are senior secured bank debt issued by sub-IG corporate borrowers. The secondary market is primarily OTC with T+7 settlement.
What is elastic net and when is it better than pure LASSO?
Elastic net blends LASSO's L1 penalty with ridge's L2 penalty. It addresses LASSO's behavior with correlated predictors via the grouping effect.
How does LASSO do automatic variable selection and what's the intuition?
LASSO minimizes the sum of squared residuals plus a penalty proportional to the sum of absolute values of coefficients.
How do I assess cash flow adequacy for credit purposes?
Cash flow adequacy assessed via FFO/Interest >4x IG, FFO/Debt >20% IG, (EBITDA-Capex)/Interest >2x, and debt amortization coverage >1x. For Lumberton: FFO/Interest 4.3x, FFO/Debt 18.4%, amortization coverage 1.67x — adequate BB+/BBB-...
How do I account for embedded derivatives in hybrid financial instruments?
Under IFRS 9, financial asset hybrids are not bifurcated (classified as FVTPL if SPPI fails). Liability and non-financial hybrids still follow IAS 39-style bifurcation when the three separation criteria are met.
How do I measure switching costs as an economic moat?
Switching costs are procedural, financial, relational, and learning barriers. Measure via win-back survey reasons, price elasticity, net revenue retention, and implementation cost. High retention with low elasticity confirms the moat...
How do network effects create moats in platform businesses?
Network effects come in four types: direct, indirect/cross-side, data, and local. Cross-side platforms like Tessera reinforce when more of one side attracts more of the other. Quantify via take rate stability, cohort retention, and time-to-liquidity...
How do I interpret Net Operating Asset Turnover trends?
NOAT drop from 1.8x to 1.2x indicates asset bloat — Pyrite's NOA grew 62% on 8% sales growth, suggesting premature capacity, working capital build, or underperforming acquisitions. Decompose by PP&E, working capital, and intangibles.
What is Buffett's owner earnings formula and how does it differ from FCFE?
Owner earnings is Buffett's alternative cash profit measure...
How do value investors use free cash flow yield?
Free cash flow yield equals free cash flow per share divided by current share price...
What is the difference between an asset sale and a stock sale in M&A?
Asset sale: buyer gets step-up in basis but seller pays double tax. Stock sale: buyer inherits basis and all liabilities.
What makes an acquisition accretive or dilutive to EPS?
Accretive means pro forma EPS rises; dilutive means it falls. But accretion doesn't equal value creation.
How do you analyze the purchase price premium in an M&A deal?
Purchase price premium is (Offer Price - Unaffected Price) / Unaffected Price. Premiums are justified only if synergy PV exceeds the premium.
What does 'free-float adjusted' mean for indices?
Free-float adjustment weights constituents by publicly tradable shares (excluding founder, government, cross-held blocks). Reduces tracking error for index funds and lowers weights for closely held firms.
How does an equal-weighted index work and why does it need frequent rebalancing?
Equal-weighted indices assign 1/N weight to each constituent. Price drift necessitates frequent rebalancing. Structurally tilts toward small-cap and value vs cap-weighted peers.
What was tax-exempt advance refunding and why was it eliminated?
Advance refunding pre-funded future calls with escrowed Treasuries. TCJA 2017 eliminated tax-exempt version; Willowcrest-style 5.25→3.4% refinance now requires taxable bonds.
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