CFAI Text : FRA: Pg363 (solution to Problem 16) solution, believe, balance, correct, finance

hw0799

I did not find any errata note on this problem:

Compared to holding securitized finance receivables on its balance sheet ,treating them as sold has the effect of reducing Financial Leverage by:

A. 6.8 %
B. 7.4%
C. 9.2%

I think I was correct in my answer of B , 7.4 %

The text says A, 6.8 %

The calculation they show would make a 3rd grader cry in shame for them:

[(1-3.7)/3.97 = 0.068]


I couldn't believe my eyes , so I did the calc and it comes to 0.68 . Lol!!

They not only got the calculation wrong , they got the arithmetic wrong too!

It should just be 3.97/3.7 = 1.074 i.e. 7.4%

FinancialAnaly

1-[3.7/3.97]

is the same as

(3.97-3.7)/3.97

they got the bracket placed wrong...

CP

llxx

A is the correct answer.

(3.97 - 3.7) / 3.97 = .068 = 6.8%

Denominator is 3.97 and not 3.7. The question says, 'compared to when it is securitized' is the key. When it is securitized, leverage is higher at 3.97, so that should be the denominator.

Although, their calculation in the solution is not correct. it should have been (3.97 - 3.7) / 3.97 instead of (1 - 3.7) / 3.97 .

Edit: 7.4% is how much the Financial Leverage increased by, over 3.7. But the question is asking how much the Financial Leverage Decreased by from 3.97, and that is 6.8%. We will need to be careful on these gimmicks in the exam. It scares me.



Edited 1 time(s). Last edit at Friday, May 21, 2010 at 12:06AM by rus1bus.