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. Based on the data in Exhibit 2, the GDP growth rate in Country A using Hollingsworth’s preferred method of calculation is closest to:
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
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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. Which translation method will Swift use to convert its financial statements into USD for inclusion in Sunjet’s consolidated statements?
Swift’s functional currency is the AUD because sales are generated in AUD and the company operates within the competitive and regulatory environment of Australia. Under IFRS, when the subsidiary’s functional currency is the local currency, translations are done using the current rate method. Thus, Swift will use the current rate method for converting its financial statements. The use of the current rate method depends on the identification of the functional currency, not on the local currency. Translations from the functional currency to the presentation currency is done using the current rate method. The local currency has an impact on translation only where it differs from the functional currency. In these cases, the translation from the local to the functional currency is done using the temporal method. Swift’s functional currency is the AUD, not the USD, because sales are generated in AUD and the company operates within the competitive and regulatory environment of Australia. If it were the USD this answer would be correct.
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4. 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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5. Which of the following is most likely a warning sign of deteriorating earnings quality? The new policy relating to:
The change in revenue recognition to an earlier point, before the product has been produced or delivered, is an aggressive accounting policy that would lower the company’s quality of earnings. The change in the warranty expense reflects updated information, and failure to act on it would underestimate earnings. The stock grants are expensed over the estimated service life of the employees, in this case the 3 years till it vests, and does not distort the quality of earnings.
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