CFA Level II Equity Investments Seminar

www.edupristine.com

CFA Level II
Equity Investments
June 2011

© Neev Knowledge Management – Pristine

Seminar Material
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Agenda
• Introduction and context
• Understanding the CFA Examination Structure
• Introduction to Equity Investments
– Valuation Concepts
– FCFF and WACC Calculations
• Complete Offering & Registration
• Contact Information

© Neev Knowledge Management – Pristine 2 www.edupristine.com

Pristine has been started by professionals with diverse experience in financial Material
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services, IT and Auto who are alumnus of IITs & IIMs

Innovative content – To improve
understanding & learning capability of
students. VisualizeFRM,
VisualizeCFA as one of the best
selling products

Topic Expert Model (TEM ) – Industry
professionals bring invaluable industry
perspective for students. Pool of 300+
working professionals as active faculty
members with the likes of CFA regional
directors, Presidents of various banks Pristine
Classroom/ Online delivery
(synchronous and
Founded with an aim asynchronous) – To increase
of creating world reach and improve efficiency of
class professionals in learning. Conducted 15+
the area of finance – batches with over 300 hours of
particularly risk recorded content
management and
Testimonial - 53% of the students join us on the investment banking
basis of referral is a testimonial of the effective Effective training methodologies to improve the performance
training methodologies of the students and enhance the employability


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Key Authorization Not for Sale

CFA Institute (2010-11)
GARP (2007-10)
Authorized Training provider – CFA
Authorized Training provider -FRM
Pristine is now the authorized training provider
Largest player in India in the area of risk
for CFA Exam trainings . Pristine is largest
management training. Trained 1000+ students
training provider for CFA in India with presence
in risk management
across seven major cities.

PRMIA (2009-10)
FPSB India (2010-11) Authorized Training provider – PRM/ APRM
Authorized Training provider -CFP Sole authorized training for PRM Training in
An authorized Education Provider for India. Largest player in India in the area of risk
Chartered Financial Planner Charter. management training. Trained 1000+ students
in risk management

© Neev Knowledge Management – Pristine www.edupristine.com

Seminar Material
Key Associations* Not for Sale

Bank Of America J. P. Morgan (2010) Mizuho (2010)
Continuum Solutions (2010) Financial Modeling in Excel Financial Modeling in Excel
Financial Modeling in Excel The Real Assets Group were trained in Bankers were using excel models that
Associates were trained on valuation and Excel for infrastructure and real
real-estate they could not understand. Conducted
mergers and acquisitions modeling financial modeling in Excel trainings to
bridge the gap

Franklin Templeton Credit-Suisse India (2009)
Suisse HSBC (2008)
CFA (2010) Risk Management and Quant. Analysis Risk Management and Quant. Analysis
Students were facing a gap in the IT Professionals of Credit
Credit-Suisse India New joinees in HSBC had a gap in
overall understanding of finance were trained on risk management. knowledge of Risk Management and
topics like corporate finance, FSA and quantitative skills. Conducted trainings
valuation. Provided training for over (On campus) to bridge the gap
100 hours to bridge the gap

*Indicative List


Seminar Material
…Key Associations Not for Sale

FMS Delhi (2010) IIM Calcutta (2010) BITS Pilani (2009)
Financial Modeling in Excel Financial Modeling in Excel
Workshops on Basics of Finance
Final Year MBA students of Faculty of Students about to go for internships and
Management Studies, Delhi University Most of the students desire a career
join jobs found a gap in their grasp of
were trained in financial modeling so as knowledge of excel for financial in finance. Conducted training for
to prepare them better for a job in modeling. Conducted training for 75+ 350+ students with an average rating
finance. students with an average rating of 4.5+ of 4.5+

NISM (2008)
Derivatives workshop for Hedging
IIT Delhi (2009) Sydenham College (2009)
Corporate in Ludhiana incurred huge
Corporate finance Financial Modeling in Excel
losses because of derivative trades
Students get placed in finance Students about to join jobs found a (for hedging). Conducted trainings for
companies (UBS, GS, MS, etc) with gap in their grasp of excel for financial directors and CFOs for better
no understanding of the subject/ Job modeling. Conducted 40+ hours of understanding of derivative products
Profile. Conducted workshop to training and helped students be ready
bridge the gap for job


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Trainer
Paramdeep Singh, Director and Faculty, Pristine
,

• Extensive experience in the financial services, consulting and training domain. He has
xtensive
extensive knowledge of the financial services industry, where he raised growth capital for
organizations and helped them improve their revenues. He has authored research papers and trained
1000s of senior people in the area of financial modeling, quantitative analysis and risk management.
•Prior to founding Pristine, Paramdeep has worked in senior management positions as an Investment
Prior
Banker with Standard Chartered Capital Markets (India) and as a consultant with Accenture
Management Consulting.
• Work experience as Industry Practitioner
• Consultant to Reliance Energy (Power), strategizing their growth and cutting down the
losses in energy distribution. He has helped them formulate their business plan.
• Assisted clients in raising capital through Private Equity & IPO by analyzing & modelling
business plans, preparing IM/DRHP, ensuring regulatory compliance and marketing the
issue. He has Successfully placed two IPOs worth Rs. 100 Crore & achieved subscription of
32 & 11 times.
• Experience as Trainer
• He has trained participants from HSBC, JP Morgan, Mizuho Bank , ING Vysya, Bank of
America for financial modelling in excel, receiving very good rating.
• Has conducted workshops and training courses in IIM Calcutta, Sydenham, Welingkar on
financial modelling in Excel receiving rave reviews
• Published research papers & articles in leading news papers in the field of risk management
and Basel II accords, which are now used by leading banks as reference material.
• Paramdeep is an MBA from IIM Indore, where he secured the highest CGPA in his batch. He has
,
completed his B. Tech and M. Tech in Mathematics and Computing from IIT Delhi


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CFA – Your Clear Interest in finance

• CFA charter provides you with a strong foundation for a variety of career choices in the investment
profession
– Interested in portfolio management, investment research, advisory services, or investment banking, you
will benefit from a CFA charter

* CFA Institute website

My Personal Experience: Many jobs with preference for CFA + MBA
(specially for Non CA background)


Seminar Material
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Agenda


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Course Structure

Topic Area Level II

Ethical and Professional Standards 10
Investment Tools (Total) 30 – 60
‒ Financial Reporting and Analysis 15 – 25
‒ Corporate Finance 5 – 15
‒ Economics 5 - 10
‒ Quantitative Methods 5 – 10
Asset Classes (Total) 35 – 75
‒ Equity Investments 20 - 30
‒ Fixed Income 5 – 15
‒ Derivatives 5 – 15
‒ Alternative Investments 5 - 15
Portfolio Management 5 - 15

Requires 200-250 Hours of studies
250


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Way to CFA

• Each exam is six hours long and is split between morning and afternoon sessions. There is a two
two-
hour lunch break at the end of the morning session.
– The Level I exam is composed of multiple-choice questions and is offered in June and December.
choice
– The Level II exam is composed of item-set questions and is offered in June only.
set
– The Level III exam is composed of item-set and essay questions and is offered in June only.
set

• Score matrix provided on the exam results is an indicator of overall performance
– The “<=50%” range is considered poor;
– “51%–70%” is considered poor to average;
– “>70%” is considered average to above average

Key to crack CFA Level II is by doing well in Equity, Ethics and FRA


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Fees Structure Levels II - Deadlines

by 16 February by 16 March
Program Enrollment
$405 $490
(new Level I only)
Exam Registration $720 $970
eBook + Print $50 $50

Total $1,175 $1,510

CFA Institute now offers three options to all its candidates You can either choose to obtain the
candidates.
curriculum in i) eBook form; ii) Print form or iii) Both eBook and in Print

Suppose a candidate chooses to enroll by 16th Feb and chooses the e-book version then her
total cost will be = 405 + 720 – 40 = $1085. If she had taken the print version she will pay
405+720+20(shipping charges) = $1145


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Agenda


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Concept Case

Given the following information regarding company XYZ
Beta of Company XYZ 1.4
Risk Free rate 7.1%
Market Risk Premium 4.2%
Cost of Debt 10.7%
Tax Rate 35%
Market Value of Debt $270 mn
Market Value of Equity $310 mn

Company XYZ has made a net profit of $24mn in 2010. While the only non cash charge is
depreciation expense which is $7.5mn. The interest expense is $4mn and the tax rate is 35%. Fixed
capital expense in the year was $8.2mn while the working capital expense was $3.5mn.


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Valuation Concepts

• Intrinsic Value
This is the true value of an asset given a complete understanding of its investment characteristics.

• Going-concern Assumption
The assumption that the company will continue its business into the foreseeable future.

• Liquidation Value
This is the value if the assets were dissolved and its assets sold individually.

• Fair Value
This is the price at which an asset will sell if both the buyer and seller are not under any compulsion to
act.


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Concept Checker

1. The fair value of a firm is the price at which an asset will sell if both the buyer and seller are under no
compulsion to act while the intrinsic value is the value obtained when the assets are liquidated. The
two statements are most likely

Fair Value Intrinsic Value
A Correct Correct
B Incorrect Correct
C Correct Incorrect


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Valuation Process


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Valuation Models

Valuation

Relative Absolute
Valuation Valuation

• Equity Valuation • Equity Valuation
‒ P/ E Multiples ‒ Free Cash Flow to Firm (FCFF)
• Enterprise Valuation • Enterprise Valuation
‒ EV / EBITDA Multiple ‒ Free Cash Flow to Equity (FCFE)
‒ EV / Sales Multiple ‒ Dividend Discount Method (DDM)
• Multiples can be calculated from both
trading comps or transaction comps
• Enterprise Value
Enterprise Value,
calculated as sum of
Cash Equity and Net Debt
Debt Net Debt1
Assets
• Equity Value
Assets Equity
Equity Value calculated
Equity as No of shares
multiplied by Share Price
• 1 Net Debt = Debt - Cash


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Case Questions

2. An analyst reviewing Company XYZ is most likely use the free cash flow model if
A. The company is an acquisition target
B. The company pays dividends
C. The company is being valued from the position of a minority investor


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Discounted Cash Flow Approach

DCF

Cash Flow Timing Expectations

Re

FCFF FCFE Dividend
WACC

n
CFi Rf Market
Firm Value   Premium
i 1 (1  Cost Of Capital ) i
β(Rm – Rf)


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Weighted Average Cost of Capital (WACC)

• The WACC is the weighted average of the after tax required rate of return for equity and debt.

rd*(1-tax)
Market Value of Debt Market Value of Equity

re
WACC

MV ( Debt ) MV ( Equity )
WACC  * rd * (1  tax rate)  * re
MV ( Debt )  MV ( Equity ) MV ( Debt )  MV ( Equity )


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Concept Checker

3. For the company XYZ what is the closest value of WACC
A. 10.18%
B. 12.45%
C. 11.25%


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Absolute Valuation Technique

• Free Cash Flow to Firm (FCFF)
• Free Cash Flow to Firm represents the cash flows to the enterprise, which includes cash
flows to both debt and equity investors
• FCFF is calculated as:
• FCFF = EBIT X (1 – Tax Rate) + Depreciation – Capex – Increase in Working Capital
• FCFF has to be discounted by the Weighted Average Cost of Capital (WACC) of the
company, to arrive at the enterprise value

• Free Cash Flow to Equity (FCFE)
• Free Cash Flow to Equity represents the cash flows to the equity investors only, after
servicing obligations towards debt investors
• FCFE is calculated as:
• FCFE = PAT + Depreciation – Capex – Increase in Working Capital + New Debt Issues –
Principal Payment on Debt
• FCFE has to be discounted by the Cost of Equity to arrive at the equity value

© Neev Knowledge Management - Pristine 23 www.edupristine.com

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Free Cash Flow to Firm (FCFF)

• Free Cash Flow to the Firm is the cash flow available to the company’s suppliers of capital after all
operating expenses and investments in working capital and fixed capital has been made.

Int * ( 1- tax) FC Investment

WC Investment
Non Cash
Charges
F
C
Net Income F
F


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Case Questions

4. The free cash flow to the firm for Company XYZ is closest to
A. $10.8 mn
B. $22.4 mn
C. $21.2 mn


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Free Cash Flow to Equity (FCFE)

• Free Cash Flow to Equity is the cash flow available after all the obligations to other investors has
been met.

Net
Borrowing
Int * ( 1- tax)
F
F C
C F
F E
F


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Case Questions

5. Assuming that the net borrowings during the year is $15mn. The free cash flow to equity is closest to
A. $34.8 mn
B. $39.7 mn
C. $42.2 mn


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Value of the Firm

• Value of the firm is then calculated as the present value of future free cash flow to the firm discounted
at the weighted average cost of capital.

FCFF0 FCFF1 FCFF2 FCFF3 FCFF4 ……….. FCFFn

n
FCFFi FCFF0 * (1  g )
Firm Value   
i 1 (1  WACC ) i WACC  g

Equity Value  Firm Value  Net Debt


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Case Questions

6. Assuming that the FCFF is expected to grow at a constant 4% rate for infinity. The firm value is
closest to (Assume that the WACC is 10.2%)
A. $107.8 mn
B. $225.4 mn
C. $375.7 mn


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Agenda


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About CFA Prep School

School for CFA Prep is
a 100 Hrs extensive training program*
that can enable you
to prepare for and crack CFA Level II Examination

www.edupristine.com

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• Extensive 100 Hours coverage
• 16 days 5 hrs of regular classes

• 3 days 5 hrs of revision classes
• 2 Mock tests

that can enable you = • Extensive Question Bank to
prepare and Practice
to prepare for and crack CFA Level II Exam • 2 Hrs of one-to-one doubt
clearing sessions*

• Qualified faculty with extensive
industry and teaching experience

www.edupristine.com

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• Proven credentials in successfully
training CFA aspirants

• Actionable and Innovative Material
• Complete Slide Pack

that can enable you = •

•
Each Session followed by Quiz

Adaptive feedback based on Quiz
to prepare for and crack CFA Level II Exam • Mock tests and feedback

• Individual doubt solving session

• CFA Visualized Formula Charts

• Summarized Recordings for
revision

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Tentative Schedule for CFA Level II – Online

Date Day Topic
26-Feb-11 Sat Quant
27-Feb-11 Sun Economics
05-Mar-11 Sat Financial Reporting & Analysis -I

06-Mar-11 Sun Financial Reporting & Analysis -II

12-Mar-11 Sat Financial Reporting & Analysis -III

13-Mar-11 Sun Corporate Finance-I

* Indicative list – Subject to Change

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Tentative Schedule for CFA Level II – Online (cont…..)

Date Day Topic
26-Mar-11 Sat Corporate Finance-II
27-Mar-11 Sun Equity Investments-I
02-Apr-11 Sat Equity Investments-II
03-Apr-11 Sun Equity Investments-III
09-Apr-11 Sat Equity Investments-IV
10-Apr-11 Sun Fixed Income Investments
Investments-I


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Tentative Schedule for CFA Level II – Online (cont…..)

Date Day Topic
16-Apr-11 Sat Fixed Income Investments-II

17-Apr-11 Sun Derivatives-I
23-Apr-11 Sat Derivatives-II
24-Apr-11 Sun Alternative Investments

30-Apr-11 Sat Portfolio Management


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How it works?

1 2 3 4 5

You signup for the program by making payment of USD 1000*

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How it works?

1 2 3 4 5

Start Preparation with material and Live Interactive Class

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How it works?

1 2 3 4 5

Work on the Problem sets/ Quizzes adapting preparation Style

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How it works?

1 2 3 4 5

Give Mock Tests/ Ask Doubts/ Revise and Complete Preparation

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How it works?

1 2 3 4 5

Plan and Achieve Success in CFA Level II Exam

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Methodology

Each topic will be explained through

Conceptual Discussion, Examples, Tests, Quizzes, Actionable
Presentations, Visualized Charts and Q&A

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Sample Innovative Material
Probability
Distributions

Normal Distribution Binomial Distribution

Normal Skewness and
Z-Score
Score
Distribution Kurtosis

• Described by mean & variance No. of σ a given
• Symmetric about its mean observation is away
• Standard Normal Distribution from population mean.
- Mean = 0; Variance =1 Z=(x-µ)/σ

Q. At a particular time, the market value
of assets of the firm is $100 Mn and the
market value of debt is $80 Mn. The
68% of Data standard deviation of assets is $ 10 Mn.
What is the distance to default?
Ans. z = (A-K) / σA
95% of Data = (100-80)/10
=2
99.7% of Data

-4 -3 -2 -1 0 1 2 3 4

Q. Which of the following is likely to be a probability distribution
function?
For X=[1,2,3,4,5], Prob[Xi]= 49/(75-Xi2)
If Z is a standard normal R.V. An event X is defined to happen if either -1< Z < 1 or For X=[0,5,10,15], Prob[Xi]= Xi/30
Z > 1.5. What is the prob. of event X happening if N (1) =0.8413, N (0.5) = 0.6915 For X=[1,4,9,16,25], Prob[Xi]= [(X i)1/2 – 1]/5
and N (-1.5) = 0.0668, where N is the CDF of a standard normal variable?
Ans. P(X)= P(-1< Z < 1) + P(Z > 1.5) Ans. The correct answer is For X=[0,5,10,15], Prob[Xi]= Xi/30
= N(1)-(1-N(1)) + N(-1.5)
= 2*0.8413-1 + 0.0668 For all values of X, probability lies within [0,1] and sum of all the
= 0.7494 probabilities is equal to 1.
-1 +1 1.5


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Sample Innovative Material
Hypothesis
Testing

Null Alternative Confidence Intervals Hypothesis Tests One tailed
Two Tailed test
HYPOTHESIS:H0 Hypothesis: Ha (CI) for Variances Test

Hypothesis that Concluded if there is Range of values within which Test if the value is greater Test if the value is
the researcher significant evidence H0 Cannot be rejected (say than or less than K different from K
wants to reject to reject H0 90% or 95%). H0; µ<=K vs. Ha: µ>K H0; µ=0 vs. Ha: µ≠ 0
Known variance, 2 Tailed test,
Type 1 error: rejection of H0 when it CI is: X”± zα/2(σ/√t) 0.2 0.2

is actually true 0.15 0.15

Type 2 error :Fail to reject H0 when 0.1
α= 0.05
0.1

it is actually false α= 0.025
α= 0.025
0.05 0.05
Inference Real State of Affairs
Based on 0 0
Sample Data H0 is True H0 is False -5 Z=0 0
Z=2.5
5
Reject H0 -5
Z=0
Reject H0

Reject H 0 Do not Reject H0
Type II error Do not Reject H0
Correct decision
H0 is True
Confidence level = 1- 
P (Type II error) = 
Correct decision
Tests for a Single Tests for a two
Type I error Population Variances Population Variances Q. If standard deviation of a
H0 is False
Significance level = * Power = 1- normal population is known to be
10 & the mean is hypothesized
*Term  represents the maximum probability of committing a
Type I error Chi-Square test F test to be 8. Suppose a sample size
of 100 is considered. What is the
range of sample means in which
hypothesis can be accepted at
Q. Co. ABC would give bonus to employees, if they get a H0: σ2 = c H0: σ12 – σ22 = 0 significance level of 0.05?
HA: σ2 ≠ c HA: σ12 – σ22 ≠ 0 Ans: SE =  = 10/√100 =1
rating higher than 7/10 from customers. A random sample n
of 30 customers is conducted with rating of 7.1/10. (n  1)s 2 s2 z = (x-µ)/ SE
2  F 1
Formulate Hypothesis? s2 = (x-8)/1
σ2 2
At 95% -1.96<z<1.96
• Null Hypothesis: H0: Mean<=7
Therefore 6.04<x<9.96
• Alternate Hypothesis : H1: Mean>7 Upper tail test: H0: σ12 – σ2 2 = 0
H0: σ2 ≤ σ02 HA: σ12 – σ22 ≠ 0
• Statistic to be measured: t-statistic, with 29 DoF HA: σ2 > σ02


/2
2
Do not reject H0 Reject H0 F
 2 Do not Reject H 0
reject H0 F/2


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What to expect at the end?

Towards the end of School for CFA Prep*
You will be able to learn the topics related to CFA Level II Exam

You will know how to solve the questions asked in CFA Level II Exam

You will get an industry perspective of the topics

You will get a certificate of participation

*assuming you follow the program and practice
assuming

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Cost of the Program

USD 795 USD 650
For individual registrations For participants joining in groups of 5 or more

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Contact Details

Questions & Doubts?

Please e-mail me at paramdeep@edupristine.com

or visit http://www.edupristine.com

or call +91 989 298 0608

www.edupristine.com

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To Register

• Wire Transfer
– Bank Name: HDFC Bank
– Country: India
– Swift Code: HDFCINBB
– Account Name: Neev Knowledge Management Pvt Ltd
– Account Number: 00602560008449
• PayPal to PayPal (Preferred)
– Create a Personal PayPal account (it is free)
– After Logging in, click on tab "My Account" and then on "Profile". Link PayPal account with your credit
card or bank account
– Click on the tab "Send Money"
– In the "To" tab enter the email id - pristinecareers@eneev.com
– Pay the fees as per package required.
• Credit Card to PayPal
– You can make the payment from your credit card to PayPal account.
– Please make the payment to email id - pristinecareers@eneev.com


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Other Pristine Offerings
Course Classroom Online Content Crash Hours of Accreditation Price
Trainings Trainings Course/ Training
Mock Test
CFA Level I All* + Yes Original Yes 100 Under Process USD 1000;
Singapore** INR 17,950
CFA Level II Mumbai, Delhi From 2010 Original From 2010 80 Under Process USD 1000;
INR 16,950
FRM Level I All + Yes Original Yes 75 GARP USD 495;
Singapore INR 12,950
FRM Level II Mumbai, Delhi Yes Original Yes 60 GARP USD 495,
INR 9,950
PRM All + Yes Original Yes 135 PRMIA USD 795,
Singapore INR 20,000
APRM Corporate From 2010 Original Yes 80 PRMIA INR 10,000
Financial Mumbai, Delhi, Yes Original NA 50 - INR 18,000
Modeling Bangalore
Finance for Mumbai No Original NA 50 - INR 45,000
Lawyers
CFP Mumbai, Delhi Yes Original NA 120 Under Process INR 20,000

Placement Colleges No Original NA 150 Not Required INR 12,000
Oriented
Training

*All cities include Mumbai, Delhi, Kolkata, Chennai, Bangalore, Pune and Hyderabad ; ** Singapore class room trainings to com
commence from
© Neev Knowledge Management – Pristine June 2010 www.edupristine.com

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Agenda


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Contact

Contact Phone Email
Unmesha Tawde +91 982 043 2652 unmesha@edupristine.com
Paramdeep Singh +91 989 298 0608 paramdeep@edupristine.com
Atul Kumar +91 932 2194 932 atul@edupristine.com


CFA Level II Equity Investments Seminar

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