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CFA Level II Updated
What is the 'growth of growth rates' concept and why does it matter for terminal value?
Terminal value sensitivity to g accelerates as g nears r — the convex relationship means small terminal-g revisions create outsized valuation swings.
How do I interpret and improve Days Inventory Outstanding?
Days Inventory Outstanding measures how many days of sales a company's inventory represents. Rising DIO without proportionate demand growth is usually a warning sign.
How does buyer concentration affect industry attractiveness?
Buyer power scales with concentration, volumes, standardization, low switching costs, and backward integration threat — reducing supplier margins.
What are 'cookie jar reserves' in earnings management, and how can an analyst detect them?
Cookie jar reserves involve overstating provisions during strong years and releasing excess reserves during weak years to smooth earnings. Analysts can detect them by comparing provision ratios to peers, tracking provision volatility against credit metrics, and watching for sudden reversals.
What is the financial reporting quality spectrum and how do analysts use it?
The financial reporting quality spectrum ranges from conservative (biased low) through neutral, aggressive (biased high), non-compliant, to fraudulent. Analysts use quantitative tools like the Beneish M-Score, accrual analysis, and peer comparisons alongside qualitative factors like footnote analysis and auditor reports to position companies along this spectrum.
How is a floorlet different from a caplet in terms of payoff and pricing?
Floorlet pays max(K-L, 0), priced as Black put on rates. Put-call parity: Caplet - Floorlet = discounted forward minus strike.
How does DBSCAN handle outliers and irregular-shaped clusters?
DBSCAN groups dense regions and labels sparse points as noise; it handles irregular cluster shapes and outliers without requiring K in advance.
When comparing firms, which profitability margin matters most?
Each margin answers a different question. Using only one leads to misjudgment; use them in sequence to triangulate.
How do I use the sovereign bond adjusted CAPM for international valuations?
Sovereign-adjusted CAPM: ke = Rf + β × ERP_mature + λ × CRP. For Varejo Azul in Brazil with 275bps sovereign spread, 0.90 lambda, and 1.05 beta: ke = 4.25% + 5.25% + 3.27% = 12.77% USD...
How do I construct an interest rate collar to hedge a floating-rate loan?
A collar combines a purchased cap with a sold floor. The sold floor's premium partially offsets the cap premium, creating a corridor of acceptable rates...
What characterizes mid-cycle sector performance and which names lead?
Mid-cycle favors Technology, Communication Services, and Industrials. Materials, Utilities, and REITs lag as rates rise and cyclical momentum fades.
How does the retail inventory method estimate ending inventory at cost?
Compute cost-to-retail ratio (goods available at cost / at retail), subtract sales from goods available at retail for ending retail, then multiply by ratio. Harborlight ends with $419.5K cost inventory from a 57.46% ratio.
How does survivorship bias inflate historical returns?
Survivorship bias excludes failed entities, overstating returns. Mira Kaltenbach's study shows 34% of 2016 funds gone; correction reduces returns 0.8-1.5% annually.
When should I use a three-stage DDM instead of a two-stage and how is the middle stage modeled?
Three-stage DDMs linearly taper growth from high to stable over a declining stage, producing more realistic valuations for maturing growth firms.
How can a company improve its cash conversion cycle?
The cash conversion cycle equals DIO + DSO - DPO. Each component offers distinct improvement levers from inventory management to collections to payables.
What metrics measure supplier bargaining power?
Measure supplier power via HHI, cost share, switching costs, forward integration threat, uniqueness, and supplier margin expansion.
What is a 'big bath' in earnings management, and why would management intentionally make a bad year worse?
A big bath involves deliberately inflating current-period losses through aggressive write-downs, restructuring charges, and expense acceleration. This depresses the current year but artificially boosts future earnings through lower depreciation, reserve reversals, and reduced expense base.
Can you break down a single caplet valuation step-by-step?
Work through caplet: d1 and d2, normal CDFs, then Black formula. Discount to payment date not fixing date.
What is hierarchical clustering and how do I read a dendrogram?
Hierarchical clustering builds a nested tree of clusters; read the dendrogram by cutting at large vertical gaps to choose a natural K.
How do I judge the quality of asset turnover?
Equal asset turnover numbers can hide very different quality. Always decompose turnover into fixed asset turnover and working capital turnover.
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