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Mental accounting is…

…the phenomenon whereby people treat one sum of money differently from another sum even though money is interchangeable aka fungible.

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Under Expected Utility Theory Individuals…

  • exhibit self control
  • follow a budget
  • are able to defer consumption
  • attempt to maximize present value of utility

According to the Asset Manager Code, managers must disclose to clients and prospective clients about fees?

Managers must disclose to prospective clients the average or expected expenses or fees clients are likely to incur.

For existing clients the actual fees and other costs charged to them must be disclosed.

Can a firm adopt the CFA Institute Asset Manager Code of Professional Conduct?

Yes. The CFA Institute Asset Manager Code of Professional Conduct has been specifically drafted for adoption by firms.

The CFA Code and Standards apply only to individual members and candidates of the CFA Institute.

Asset Manager Code of Professional Conduct 6 General Principals

  1. Act in a professional and ethical manner at all times.
  2. Act for the benefit of clients.
  3. Act with independence and objectivity.
  4. Act with skill, competence, and diligence.
  5. Communicate with clients in a timely and accurate manner.
  6. Uphold the applicable rules governing capital markets.

Modigliani-Miller with tax Value VS WACC

MM Preposition I

  • Value does change because of the tax shield of debt. Value is maximized when debt is 100% of capital structure.

MM Preposition II

  • WACC does change because of the tax shield of debt. WACC is minimized when debt is 100% of capital structure.

When volatility increases, option price ____ and OAS ____.

The option price/value increases with volatility and the Option Adjusted Spread decreases.

Remember:

Z-Spread = OAS + put option cost

Z-Spread =OAS – call option cost

Is a lower or higher M-Score better?

An M-Score less than -2.22 suggests that the company is not an earnings manipulator so lower is better and an M-Score below -2.22 is best.

A high M-Score indicates earnings manipulation is being undertaken.

Is a lower or higher justified PEG ratio better?

The lower the PEG ratio the more then stock may be undervalued.

The higher PEG ratio stock is less able to justify its P/E ratio relative to its implied growth rate.

A broad rule of thumb is a PEG ratio less than one is desirable.

The Cost Approach to Real Estate Valuation

  1. Estimate the market value of the land.
  2. Estimate the building’s replacement cost including builder’s profit.
  3. Deduct depreciation including physical deterioration, functional obsolescence, locational obsolescence, and economic obsolescence.

Use the cost approach for relatively new properties, unusual properties, or properties with few comparable transactions.