CFAI Mock AM Q 22. Holding Period Return. investment, question, solution, holding

hanvinh

My understanding of HPR is that it is the rate of return earned on an investment irrespective of the duration of holding period whether it is few years or few months.
But in the solution to this question it says “The HPR is not annualized for holding periods shorter than a year.” So do we have to annualize the HPR if the holding period is more than a year?

soverby

Problem 66 CFAI MOCK AM:
Yes, A higher expense (warranty expense) on the Financial statements for reporting will reduce the EBT and result in paying lower taxes for financial reporting purpose.
But in tax book, which looks at actual cash payments  The Income (EBT) is reported more than what is reported in the financial statements because of the lower warranty expenses (actual expenditure) in the tax books. Therefore you pay more cash in taxes to the tax authority than what you have shown in the financial statements for reporting. This results in a prepaid expense (tax expense) is an asset.
Mj.. let me know if it makes sense.

wilslm

No problem, Vthomas…take a look at #66 and see if you can explain to me why the answer is a deferred tax asset and not liability, b/c I don’t understand it (just created a new thread on the board about it).

soverby

Thanks Mj. That was my reasoning too, but the assertion in the solution was trying to make me think more into it.

kkn006

It is a little confusing, but it is explaining that you don’t annualize the yield like you do with all of the other yield calculations. In this case it is shorter than a year, but if it were a calculation for a 15 month period, you wouldn’t annualize that either. It is simply the yield for the amount of time the security is held. Hope that helps.

Windjam

Thanks BK for your input. But do you think it is an error in the solution or do you have any reasoning behind it?
The quoted sentence confused me alittle.