Costs of asymmetric information refer to costs resulting from the fact that managers typically have more information about a company’s prospects and future performance than shareholders or creditors. Firms with complex products or little transparency in financial statements tend to have higher costs of asymmetric information, which results in higher required returns on debt and equity capital.
Because shareholders and creditors are aware that the management know more than they do, these investors will try to infer “signals” from the management’s actions. Specifically, taking on debt financing is making a commitment to make fixed interest payments, and is usually a sign of manager confidence in having future cash flows that are able to meet these obligations. Issuing equity, on the other hand, is typically viewed as a negative signal that managers believe the firm’s stock is overvalued.
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Have you ever gotten stuck in your study because you can’t remember a formula, or what a specific term means? Now, say goodbye to scanning through all the videos and ploughing through pages and pages just to find what you are looking for. All the important formulas, definitions and diagrams you need for the exam are now at your fingertips at prepnuggets.com/glossary.
What’s more, these quick references are deeply integrated in our lessons, so you get a good idea of what the lesson covers even before watching the video. The references also point you to specific video lessons where it is covered, so you can quickly access the corresponding video to learn more about the term.
Available now for all Level I topics, this service is exclusive for our Premium and Pro members only. We will progressively add the rest of the topic areas over the next few months.
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Welcome to PrepNuggets
Hey visitor,
Are you a CFA Level I candidate, or someone who is exploring taking the CFA exam? Four years ago, I was in your shoes. I am a Computer Engineering graduate and have been working as an engineer all my life. Having developed a keen interest in finance, I decided on a career switch to the finance field and enrolled into the CFA program at the same time.
Was it tough? You bet!
Adjusting to the drastic career change was tough. I naturally neglected the preparation for my Level I exam in June 2014. It was not until the middle of March 2014 that I realized I only had a little more than 2 months to the exam. To compound my problems, I basically did not have a preparation strategy. Having no background in finance at all, I tried very hard to read the curriculum from cover to cover, but eventually that fell flat. I can still recall the number of times I dozed off while studying, or just going back and forth trying to understand even the simplest concept. My mind simply could not keep up after a hard day at work.
Does all these sound familiar to you? Well, take heart. No matter how bleak it seems, at least sit for the exam and treat it as a learning experience. That was basically my attitude as I burrowed through my exam prep with toil and stress. By God’s grace, I did pass my Level I exam in June 2014. It was an experience I would not want to revisit though.
Tweaking the approach
For the Level II exam, I endeavoured not to repeat the mistakes I made. Based on the Pareto 80/20 principle, I learnt to extract the most essential bits from the curriculum enough to give me that 80% result to pass. Being a visual learner, I took notes and summaries in pictorial form. Instead of reserving huge segments of time to study, I carved out pockets of time to learn and practise – accommodating to my full-time job. I managed to pass my Level II and Level III exams consecutively with considerably less effort and stress than when I did my level I.
Why PrepNuggets?
I love the CFA Program and truly value the skills and ethics that are imparted to make me a better finance professional. My desire is to help candidates who are keen to pursue this path to do so in the most effective and painless process as possible – based on the lessons that I learnt as a candidate. I have set up PrepNuggets with the vision to revolutionise learning by using technology, catering to the short attention span that we can afford. If this makes sense to you, join the PrepNuggets community by signing up for your free student account. I am confident that the materials that we have laboriously crafted will bring you closer to that dream pass with just that 20% effort. Let us do the hard work for you.
Regards,
Keith Tan, CFA
Founder and Chief Instructor
PrepNuggets
About the Author
PrepNuggets
Keith is the founder and chief instructor of PrepNuggets. He has a wide range of interests in all things related to tech, from web development to e-learning, gadgets to apps. Keith loves exploring different cultures and the untouched gems around the world. He currently lives in Singapore but frequently travels to share his knowledge and expertise with others.
