5 questions will be shown from 30 free practice questions to prepare you for the CFA level 2 exam. Enjoy!
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1. Which of Annisquam’s comments regarding binomial interest rate trees is least likely correct?
. Annisquam is incorrect in Comment 1. The interest rate tree performs two functions in the valuation process: (1) generating the cash flows that are interest rate dependent and (2) supplying the interest rates used to determine the present value of the cash flows.
because Comment 3 is correct. because Comment 2 is correct.
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2. Who makes the most accurate statement in regard to Wadgett’s current valuation?
. Covey’s statement is based on the idea that a firm’s stock price increases if it is the target of an acquisition (i.e., a control premium). Consequently, when the acqui- sition failed with no apparent future threat of a takeover, the stock price decreases as the control premium vanishes. . The subsidiary of a conglomerate generally has a value that is below its stand-alone value due to a conglomerate discount.
. Pairs trading is a relative value strategy that does not consider the actual intrinsic value of a given firm.
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3. With respect to LeCompte’s coverage of UniFlash, according to the CFA Institute Standards of Professional Conduct, the least appropriate course of action for Topaz to take would be to:
. According to Standards I(B)–Independence and Objectivity and V(A)–Diligence and Reasonable Basis, members and candidates must exercise diligence, independence, objectivity, and thoroughness in analyzing investments, making investment recommen- dations, and taking investment actions. Changing a written recommendation to what a subject company desires is not acting diligently, independently, objectively, and/or thoroughly, and the analyst should immediately revise her recommendation to express her stated opinion of the company.
Changing a written recommendation to what a subject company desires is not acting diligently, independently, objectively, and/or thoroughly.
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4. The lower market prices Betta observes for Bay Corp bonds is most likely explained by:
. 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.
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5. In regard to calculating Wadgett’s FCFF, the comment that is most appropriate is the one dealing with:
. 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).
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