Dear CFA Level I Candidate, so far, we have seen the Commandments and Sins of Fixed Income and Economics. I am sure they have helped you while solving your mock exams.
- In this session, we will take a look at the Commandments and Sins of Corporate Finance.
- If we are asked to choose 1 project among 2 where the decision based on NPV and IRR conflicts, chose the project that has the higher NPV.
- The decision to take a project based on Profitability Index is that PI>1.
- While calculating the cost of capital, remember to always consider the after tax cost of debt.
- Treatment of Flotation Costs – Adjust them to the initial project cost.
- Country Risk Premium = Sovereign Yield Spread * (std dev Equity Index of Developing Country/std dev Sovereign Bond in terms of the developed market currency)
The revised CAPM formula:
Cost of Equity = Rf + B(E(Rm)-Rf + CRP)
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