Solving Exams based on Psychometric Testing (Part A)

I had posted a document which was made public by the CFA Institution. It was related to the Psychometric Testing techniques which the CFA Institution use in its exam. A few days back I appeared in a test regarding Corporate Finance and to my surprise I scored below average marks in that despite of my preparations which made me confident. While analysing my mistakes I figured out that they were not mistakes but blunders! Out of nowhere the document which the CFA Institution had published came into my mind and I started searching over Psychometric testing and the ability of the exam to judge knowledge and skills. Some important tips which I found over the internet at multiple places were quite helpful, thought to share them with you.

General preparation

·                    Test-taking is a skill which can be developed.  You can improve your performance with practice, so start preparing as early as you can.

·                    Ask for sample tests from your careers service and practise taking them.  In the case of prospective employers, find out what kind of tests you will be required to do and ask if example questions are available. 

·                    Spend time looking at the formats of different tests and answer sheets.  This will help you to become more comfortable with them so that you feel on familiar ground when you see the test paper.

·                    Practise timing yourself.  Pacing yourself is a vital skill in timed tests and it is a skill that you can improve with practise.  Practising with other people is a good way to create test conditions.

·                    Review basic maths, particularly calculations you know you find difficult.  Think of possible mathematical operations that could be required and practise them.  Make sure you can interpret graphs, tables, pie charts, etc.

·                    Improve your vocabulary and comprehension by reading.  Look up the meanings of words you are unsure of.  Practise reasoning through what is clearly true or untrue from passages of information.  Review your understanding of grammar and practise spotting associations between words or types of words.

·                    Take care of your physical health and get several good night’s sleep in a row before the test.

·                    If you have experienced serious problems with nerves or sleeplessness around exams, it is worth getting advice about how to deal with this in advance.   

(Continued)

Some important numbers related to Facebook

The company says that the debut would be the largest, generating $5bn in the offering, since Google. 85% of the revenues come through advertisement and 12% of the revenues came through transaction fee from Zynga, a social gaming platform which is known for Farmville and other games. The remainder comes from transactions fees for sales in other games and digital goods like movies and music.

As of 31st December 2011, Facebook had 845m monthly active users which were around 39% above than the previous year. Daily active users are at 483m. The revenues have increased 88% from 2010 and the net income rose 65% from $606m in 2010 to $1bn in 2011.

Apparently no tangible assets yet some inspiring numbers. What should we call it a miracle of Technology or Evolution?


Some important numbers

Revenue	$3.7bn
Costs	$1.9bn
Profit	$1bn
Cash on hand	$3.9bn
% of revenue from advertising	85%
Zuckerberg bonus first half 2011	$220,500
Users	845m
Mobile users	425m
Friendships	100bn

Source: Financial Times

Roche - Personalized Healthcare

I had posted yesterday regarding the developing story of Roche attempting to takeover Illumina. I was looking at the website of Roche and came across some interesting information. The concept of personalized healthcare is relatively new and a lot of research is being carried in this regard. Roche heavily invests in biotechnology and it has invested over 8 billion Swiss francs in 2011 in research and development. Regarding the concept of Personalized Healthcare, the following video throws some light over it.

Investors see these developments and progress as signals regarding the future performance of the company. These sentiments are seen in the price of stock and the investors behaviour in terms of going long on stocks. The attempt of acquiring Illumina is a move in progressing towards Personalized Healthcare.

Housing Price Conundrum (Part 2)

Roche attempting to acquire Illumina

Roche a Swiss based drug maker has attempted to acquire Illumina, a US based company which is excelling in Gene mapping technology. Roche has given a tender offer to the shareholders directly bypassing the management in a hostile attempt. It would have been a friendly acquisition if the management of Illumina had shown some response to the Swiss drug maker. It is a huge move as Illumina is in the phases of developing a machine which could equip the company to generate information of individual human beings gene and so that the drug making companies could utilize that information to create 'customized' cancer medicines which could result in more productivity.

The tender offer is of $5.7bn with $44.50 offer per share. This offer has reflected a positive signal to the investors and the share price for Illumina has risen while the share price of Roche has fallen as the investors have thought it would be a lengthy bid battle and would end in Roche paying more.

The management of Illumina has decided to take a take over defence through Poison pills. They may offer their existing shareholders the right to purchase additional shares at discount from the market making it costly and ultimately difficult for Roche to perform the deal.

This deal would be an advancement for Roche in the field of personalized medicine and the motive is clear to have unique capability being owned. The growth of Illumina is remarkable and it will add value to Roche. An interesting story is developing as I was going through Mergers & Acquisitions and the terminologies like tender offer, poison pills etc. have just been read and understood by me. I will be tracking this story to see how it ends. 

Held for Trading Investments

These are debt or equity securities acquired with the intent to sell them in the near term.
Accounting Treatment:
· Held-for-Trading securities are reported initially at Fair value on the balance sheet.
· Transaction costs are not included in fair value; neither initially nor subsequently.
· At each reporting date, these investments are remeasured and reported at fair value.
· Any unrealized gains or losses arising from changes in fair value are reported in Income Statement.
· Interest received on debt securities and dividends received on equity securities are reported in Income Statement.


Summary of Accounting Treatment of Held-for-Trading
(e.g. Bond):
1. Balance sheet value = Fair value of Bond
2. Interest Revenue = Value of Bond(t-1) × market interest rate at issuance
    · Interest Revenue is recognized in the Income Statement.
3. Unrealized Gain/loss = Fair value – carrying amount (adjusted for the difference between coupon and interest revenue)
    · Unrealized Gain/loss is recognized in the Income Statement.
4. Realized Gain/loss = Sale price – Fair value
    · Realized Gain/loss is recognized in the Income Statement.

Interest Rate Trends in US

Interest rates are determined considering the supply and demand of funds. If supply is in excess the interest rates fall and if demand is more than the supply the interest rates tend to rise. Other factors which govern interest rates include the economic growth and the life cycle which the economy is experiencing. Inflation is another important factor which manuevors the interst rates. As nominal interest rates have the effect of inflation in them. The quantity of money supply is another factor which hold importance in level of interest rates.

As far as the graph is concerned it has shown increasing trends from 1930 to 1980 and then the rates have fallen to approximately the same level in 2010. A maximum tick of around 16% has been hit by the interest rates in 1980s and the lowest is almost neglibile i.e. between 0 to 1%.

It is important to note that in economic recession the interest rates have fallen. The reason behind this phenomenon could be the decision of the FED to increase the supply of money to facilitate production and so that employment could generate and economy could perform well.

Some great recessions were experienced by the ecnonomy in 1930s and in 2007,08. The graph is evidend that the interest rates have fallen close to 0% during these periods. When the economy is experiencing a boom the interest rates have risen up. It could be due to demand pull inflation that the interest rates have risen and may be due to technological boom when the economy is performing well and more than the optimal level, the FED has decided to increase the interest rates so that borrowing could be discouraged. These trends are evidend from the above illustrated graph.

Held to Maturity Investments

These are the investments in financial assets with:
· Fixed or determinable payments.
· Fixed maturities (debt securities).
Under both IFRS and U.S. GAAP, the investor must have a positive intent and ability to hold the security to maturity.
Under both IFRS and U.S. GAAP, an entity is not permitted to classify any financial assets as held-to maturity if it has during the current or two preceding financial reporting years, sold or reclassified more than an insignificant amount of held-to-maturity investments before maturity (unless the sale or reclassification meets certain criteria).


Accounting Treatment under IFRS:
· Held-to-maturity securities are initially recognized at Fair value + Transaction costs
· At each reporting date (subsequent to initial recognition), Held-to-maturity securities must be reported at amortized cost using the effective interest rate method.
Amortized cost = Original Cost of the debt security + discount - premium
· Any discount (par value> fair value) or premium (par value < fair value) existing at the time of purchase is amortized over the life of the security.
· Any interest payments received are adjusted for amortization and are reported as interest income.
· If the security is sold before maturity, any realized gains or losses arising from the sale are recognized in Income Statement of the period.


Accounting Treatment under U.S. GAAP:
· Held-to-maturity securities are initially recognized at Historical Cost + Transaction costs
· At each reporting date (subsequent to initial recognition), Held-to-maturity securities must be reported at amortized cost using the effective interest rate method.
· Any discount (par value> fair value) or premium (par value < fair value) existing at the time of purchase is amortized over the life of the security.
· Any interest payments received are adjusted for amortization and are reported as interest income.
· If the security is sold before maturity, any realized gains or losses arising from the sale are recognized in profit or loss of the period.

Housing Price Conundrum (Part 1)

Apple Inc. Balance Sheet Extracts and Some Ratios

PERIOD ENDING	Sep-11	Sep-10	Sep-09	Sep-08
All numbers in thousands
Inventories	776,000	1,051,000	455,000	509,000
Receivables	11,717,000	9,924,000	5,057,000	4,704,000
Total Current Assets	44,988,000	41,678,000	31,555,000	34,690,000
Total Assets	116,371,000	75,183,000	47,501,000	39,572,000
Total Current Liabilities	27,970,000	20,722,000	11,506,000	14,092,000
Total Non-Current Liabilities	11,786,000	6,670,000	4,355,000	4,450,000
Total Liabilities	39,756,000	27,392,000	15,861,000	18,542,000
Total Equity	76,615,000	47,791,000	31,640,000	21,030,000
Total Revenues	108,249,000	65,225,000	42,905,000	32,479,000
Cost of Sales	62,617,000	38,514,000	24,949,000	20,861,000
Total Net Income	25,922,000	14,013,000	8,235,000	4,834,000
Revenue on Assets	0.93	0.87	0.90	0.82
Asset Turnover	1.08	1.15	1.11	1.22
Return on Assets	0.22	0.19	0.17	0.12
Return on Equity	0.34	0.29	0.26	0.23
Receivables Turnover	9.24	6.57	8.48	6.90
Inventory Turnover	80.69	36.65	54.83	40.98
Current Ratio	1.61	2.01	2.74	2.46
Quick Ratio	1.58	1.96	2.70	2.43
Financial Leverage	1.52	1.57	1.50	1.88