In this series of revision posts, we ask your AB Maximus CFA® Program exam trainers to give you quick tips and essential advice for different chapters in the syllabus. Handy for revision or simply for a last minute review to make sure you’re thoroughly prepared – don't miss the chance to brush up on your knowledge and do a little extra prep!
3 must-know concepts are: The effect of capex on cash flow differentials, the three capital structure situations, and how the change in percentage of debt affects other factors.
1. The effect of capex on cash flow differentials
When doing questions on capital budgeting, find out the cash flow differentials caused by potential capex (capital expenditure). Don't forget to account for depreciation, which affects pre-tax income and therefore tax cash outflow. Also remember to consider the tax effect the on the gain or loss when an old machine is disposed.
2. The three capital structure situations
For capital structure, understand the implications and rationale under three situations: perfect market, with tax and with financial distress costs.
3. How the change in percentage of debt affects other factors
Understand the relationship between Cost of Equity, the D/E ratio and WACC as we change the % of Debt in the capital structure.
A good tip is: Focus your answers for corporate governance on the information in the study material.
It’s easy to make the corporate governance aims much broader – but don’t stray from the aims and key suggestions in the study materials. Be very clear about these specific matters and understand how the various parts fit in to a reading from the curriculum. For practice, try breaking these up, pooling them together, or re-arranging them into something you’re more comfortable with.
A good resource is: Professor Damodaran's website.
Though most of the items in the study/revision texts should suffice, students who want to go further can have a look through these articles.
About the Author
Eric Koh, CFA, MBA, PhD is the AB Maximus trainer for Corporate Finance. He had worked as an auditor in an international public accounting firm, in banks and in a global shared service centre. He is a member of CPA Australia and the Malaysian Institute of Accountants, and has served in the Asian Institute of Chartered Bankers.