KASNEB CIFA Advanced cheat sheet

NPV = sum of Ct/(1+r)^t minus the initial outlay C0; accept a project when NPV > 0 and, for mutually exclusive projects, choose the highest positive NPV.

IRR is the discount rate at which NPV = 0; accept when IRR exceeds the required rate of return. Non-conventional cash flows can generate multiple IRRs, and IRR implicitly assumes reinvestment at the IRR itself.

Profitability index = present value of cash inflows divided by the initial outlay; accept when PI > 1 and use it to rank projects when capital is rationed.

Payback period ignores the time value of money and all cash flows after the cut-off; discounted payback corrects the discounting flaw but still ignores post-cut-off flows.

CAPM: E(R) = Rf + beta x (Rm - Rf). Beta is the only risk factor priced; unsystematic risk can be eliminated by diversification and earns no premium.

Fisher relation: (1 + nominal rate) = (1 + real rate) x (1 + inflation rate); for small rates nominal is approximately real plus inflation.

Gordon growth model: P0 = D1 / (k - g), valid only when k > g. A higher growth rate raises the value; a higher required return lowers it.

Bond value = sum of C/(1+y)^t plus F/(1+y)^n. Price and yield are inversely related, and the price-yield relationship is convex, not linear.

WACC = (E/V) x Ke + (D/V) x Kd x (1 - t), using market-value weights and the after-tax cost of debt; it is the hurdle rate for projects of average business risk.

EPS = (net profit after tax minus preference dividends) divided by the weighted average number of ordinary shares in issue during the period.

P/E ratio = market price per share divided by EPS. A high multiple reflects expected earnings growth or low perceived risk; valid comparisons require similar industry and accounting policies.

Payout ratio = DPS / EPS; retention ratio b = 1 - payout ratio. Under the sustainable growth assumption, g = b x ROE.

Dividend cover = EPS / DPS, which is the reciprocal of the payout ratio; a low cover signals a dividend at risk of being cut.

Book value per share = ordinary shareholders' equity divided by the number of ordinary shares; it is an accounting measure and need not reflect market or intrinsic value.

Current ratio = current assets / current liabilities; quick ratio = (current assets - inventory) / current liabilities, testing liquidity without relying on stock conversion.

DuPont decomposition: ROE = net profit margin x total asset turnover x equity multiplier, where the equity multiplier equals total assets divided by equity.

Interest cover = EBIT / interest expense; a declining ratio indicates rising financial gearing and greater default risk for lenders.

Efficient market forms: weak form covers past prices, semi-strong form covers all public information, strong form covers all information including private. Technical analysis is useless under weak form, fundamental analysis under semi-strong form.

Expected portfolio return E(Rp) = sum of wi x E(Ri); it is a simple weighted average and contains no correlation term.

Two-asset variance: sigma_p^2 = w1^2 sigma1^2 + w2^2 sigma2^2 + 2 w1 w2 rho12 sigma1 sigma2. Risk reduction is maximised at rho = -1 and disappears at rho = +1.

Beta = Cov(Ri, Rm) / variance(Rm) = rho_im x sigma_i / sigma_m; the beta of a portfolio is the weighted average of the betas of its constituent assets.

Sharpe ratio = (Rp - Rf) / sigma_p, measuring reward per unit of total risk; Treynor ratio = (Rp - Rf) / beta_p, measuring reward per unit of systematic risk.

Jensen's alpha = Rp - [Rf + beta_p (Rm - Rf)]; a positive alpha indicates outperformance after adjusting for systematic risk.

The capital market line plots expected return against total risk for efficient portfolios, while the security market line plots expected return against beta for all assets.

An asset plotting above the security market line has an expected return exceeding its required return, so it is undervalued and offers positive alpha.

Only systematic risk is compensated in equilibrium; unsystematic risk falls towards zero as the number of holdings in a portfolio increases.

Modified duration = Macaulay duration / (1 + y/m); the approximate percentage price change of a bond equals minus modified duration multiplied by the change in yield.

The primary market raises new capital through initial public offers, rights issues and bond issues; the secondary market trades already-issued securities, providing liquidity and price discovery without new capital to the issuer.

Money market instruments mature within one year (treasury bills, commercial paper, certificates of deposit, repos); capital market instruments exceed one year (shares and bonds).

Treasury bill discount yield = [(face value - price) / face value] x (360 / days to maturity); the effective annual yield is higher because it is computed on the price paid, not the face value.

Underwriting forms: firm commitment, where the investment bank buys any unsold securities and bears the issue risk; best efforts, where the issuer bears the risk of unsold stock.

The bid-ask spread is a transaction cost equal to the difference between the buying and selling quotes; it widens with illiquidity and volatility and narrows as the number of market makers rises.

Term structure theories: expectations theory (forward rates drive the curve), liquidity preference theory (long-term investors demand a premium) and market segmentation theory (separate supply and demand at each maturity).

Yield curve shapes: normal or upward-sloping, inverted or downward-sloping (often read as a recession signal), and flat as a transitional state between the two.

Book building discovers the offer price from investor bids collected across a price range before allotment; a fixed-price offer sets the price before demand is known.

In Kenya the Capital Markets Authority licenses and supervises market intermediaries, and the Nairobi Securities Exchange All Share Index (NASI) is a market-capitalisation weighted index.