CFA Level 2 Free Practice Test

. Cash flow from operations (CFO) already reflects changes in working capital items, therefore Paschel’s first comment is correct. EBITDA has the non-cash charges of depreciation and amortization added back, so Covey’s statement is incorrect, not all non-cash charges will need to be added back. Net borrowing is added back for FCFE not FCFF, so Paschel’s second statement is incorrect.
. Depreciation has already been added back to EBITDA, though there may be other items that still need to be added back.
. Adjusting for net borrowing is not necessary for FCFF (just FCFE).

Hollingsworth;s preferred method of calculating the GDP growth rate is the Solow growth accounting equation, and the rate is calculated as follows:
ΔY/Y = ΔA/A + α(ΔK/K) + (1 – α)(ΔL/L) where
ΔY/Y = Growth in gross domestic product, GDP ΔA/A = Growth in total factor productivity = 1/5% ΔK/K = Growth rate of capital = 3.2%
ΔL/L = Growth rate of labor = 0.4%
α = Output elasticity of capital = 0.3
1 – α = Output elasticity of labor = 0.7
Thus, ΔY/Y = 1.5 + (0.3 × 3.2) + (0.7 × 0.4) = 1.5 + 0.96 + 0.28 = 2.74. The calculation did not apply (1 – α).
ΔY/Y = 1.5 + (0.3 × 3.2) + 0.4 = 1.5 + 0.96 + 0.4 = 2.86
The inflation rate was incorrectly used in place of TFP in the calculation.
ΔY/Y = 1.7 + (0.3 × 3.2) + (0.7 × 0.4) = 1.7 + 0.96 + 0.28 = 2.94

. Betta has taken the correct approach in using actual coupon bonds for Bay Corp and estimating implied zero-coupon bonds. Because the bonds rank equally, there is no need to adjust for differences in priority in case of default. In practice, bond prices will be affected by liquidity, and investors expect additional spread or a liquidity premium to compensate for less liquid corporate bonds relative to sovereign bonds.
because there is a need to convert coupon bonds to implied zero-coupon bonds to infer the spread.
because no adjustment is necessary for differences in priority since all the bonds in this case rank equally.

. LeCompte provided all the recommended disclosures relating to potential conflicts of interest with respect to UniFlash. In addition to her small equity position in NanoMem and the firm’s market making role for NanoMem shares, LeCompte should have also disclosed the “benefit received” from NanoMem concerning the trip she took as required by Standard 2, Public Appearances. In addition, if news of the secondary offering of NanoMem had already been made public, she should have also disclosed the fact that Topaz had been appointed the lead underwriter.
LeCompte only provided recommended disclosures relating to potential conflicts of interest with respect to UniFlash.

. The recommended procedures for compliance with Research Objectivity Requirement 11, Rating System, states that firms should prohibit covered employees from communicating a rating or recommendation different from the current published rating or recommendation.
because she communicated a rating different from her current published rating contrary to Recommendation 11, which states that firms should prohibit covered employees from communicating a rating or recommendation different from the current published rating or recommendation.
because the statement alone about issuing a new report is not a viola- tion. If she disclosed her new recommendation contrary to Recommendation 8, which recommends that reports and recommendations be issued at least quarterly, with additional updates recommended when there is an announcement of significant news or events by, or that might impact, the subject company.