thank you, unknown professor!
Mike:
The morning session was pretty much "down the middle of the fairway" - mostly core stuff. The afternoon, on the other had tested a fair bit of stuff that was kind of arcane. For example, they had a full item set of real estate valuation, which means that a full 5% of the exam was based on stuff that's not that typically used. But this isn't unusual for CFAI - they almost always have one item set on a seldom-used topic.
I can't blame them - I should have put in more time.
Ah well, back to research.
One of my former students sat for the Level II exam and said that the afternoon session was brutal compared to the morning, so there appears to be some sort of consensus fitting your experience.
Liza:
whether or not you include interests costs or nopt depends on what you're doing. In a capital budgetting exercise, you do NOT include interest costs, since the costs are included in the cost of capital (typically WACC).
In a valuation exercise, you include interest costs (and net payments ot creditors) if your're valuing based on free cash flow to equity (this is a levered cash flow concept). UIn this case, you discount at the cost of equity.
OTOH, if you're valuing based on free cash flow to the firm, you do not deduct interest costs, and use WACC as the discount rate.
The one exception seems to be the real estate industry. They use after-leverage cash flows, initial inestment, and terminal cash flows, and calculate a "Levered" IRR.
The only divergence between CFA procedure and standard practice is in the treatment of flotation costs for equity in capital budgetting exercises. The "textbook" treatment is to recognize them in the calculation of cost of equity (i.e. deduct the flotation costs from stock price when using the DCF method for calculating cost of equity). CFA, OTOH, adds the flotation costs to the initial outlay. I tend to go with their approach if equity yhas been issued specifically to fund the project.
Hi, I just stumbled upon your blog today. I sat for L1 yesterday..not sure how that went. Anyway, sorry to hear about your son. I wish him well.
Q: For L1 CFA, CF, the materials on DCF state that the interest line is not to be included in the DCF calculation, as the interest cost is reflected in the discount rate. Do you agree with this principle?
When I refer back to CF textbooks, eg. Breally & Myers; Damodaran, they are either silent on this, or have included the interest line item as part of the DCF. Even my colleague who has a masters in finance argued against me on the non-recognition of interest in the DCF.
I figured you might be the best person to answer me about this, since you are a finance professor and you're sitting for CFA.
Thanks.
Liza
(needs to have a firm answer to determine the NPV for work purpose).
I felt the same way about morning session vs. afternoon session.
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