Free Latest CFA Institute CFA Level 2 Exam Questions

Free Latest CFA Institute CFA Level 2 Exam Questions

To pass the CFA Level 2 exam on the first try, you must have accurate syllabus information and an excellent study guide. FreeTestShare CFA Institute CFA Level 2 Exam Questions give you in-depth knowledge of the exam syllabus. To create an effective study strategy, obtain official information regarding the exam’s syllabus and format. This CFA Institute CFA Level 2 Exam Questions will assist you in determining the types of questions and topics that will be covered on the CFA Level 2 test. Latest CFA Institute CFA Level 2 Exam Questions from FreeTestShare are the greatest way to ensure your success in only one sitting.

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1. James Walker is the Chief Financial Officer for Lothar Corporation, a U.S. mining company that specializes in worldwide exploration for and excavation of precious metals. Lothar Corporation generally tries to maintain a debt-to-capital ratio of approximately 45% and has successfully done so for the past seven years. Due to the time lag between the discovery of an extractable vein of metal and the eventual sale of the excavated material, the company frequently must issue short-term debt to fund its operations. Issuing these one to six month notes sometimes pushes Lothar's debt to capital ratio above their long-term target, but the cash provided from the short-term financing is necessary to complete the majority of the company's mining projects.



Walker has estimated that extraction of silver deposits in southern Australia has eight months until project completion. However, funding for the project will run out in approximately six months. In order to cover the funding gap. Walker will have to issue short-term notes with a principal value of $1,275,000 at an unknown future interest rate. To mitigate the interest rate uncertainty, Walker has decided to enter into a forward rate agreement (FRA) based on LIBOR which currently has a term structure as shown in Exhibit 1.







Three months after establishing the position in the forward rate agreement, LIBOR interest rates have shifted causing the value of Lothar's FRA. position to change as well. The new LIBOR term structure is shown in Exhibit 2.



While Walker is estimating the change in the value of the original FRA position, he receives a memo from the Chief Operating Officer of Lochar Corporation, Maria Steiner, informing him of a major delay in one of the company's South African mining projects. In the memo, Stciner states the following: "As usual, the project delay will require a short-term loan to cover funding shortage that will accompany the extra time until project completion. I have estimated that in 210 days, we will require a 90-day project loan in the amount of $2,350,000.1 would like you to establish another FRA position, this time with a contract rate of 6.95%."



Which of the following is closest to the value of the forward rate agreement three months after the inception of the contract (from Walker's perspective)? For this question only, assume that the interest rate at inception was 6.0%.

2. High Plains' average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.



Which of the following statements about evaluating High Plains financial reporting quality is least accurate?

3. MediSoft Inc. develops and distributes high-tech medical software used in hospitals and clinics across the United States and Canada. The firm's software provides an integrated solution to monitoring, analyzing, and managing output from a variety of diagnostic medical equipment including MRls, CT scans, and EKG machines. MediSoft has grown rapidly since its inception ten years ago, averaging 25% growth in sales over the last decade. The company went public three years ago. Twelve months after their IPO, MediSoft made two semiannual coupon bond offerings, the first of which was a convertible bond. At the time of issuance, the convertible bond had a coupon rate of 7.25%, par value of $1,000, a conversion price of $55.56, and ten years until maturity. Two years after issuance, the bond became callable at 102% of par value. Soon after the issuance of the convertible bond, the company issued another series of bonds which were putable, but contained no conversion or call features. The putable bonds were issued with a coupon of 8.0%, par value of $1,000, and 15 years until maturity. One year after their issuance, the put feature of the putable bonds became active, allowing the bonds to be put at a price of 95% of par value, and increasing linearly over five years to 100% of par value. MediSoft's convertible bonds are now trading in the market for a price of $947 with an estimated straight value of $917. The company's putable bonds are trading at a price of $1,052. Volatility in the price of MediSoft's common stock has been relatively high over the last few months. Currently the stock is priced at $50 on the New York Stock Exchange and is expected to continue its annual dividend in the amount of $1.80 per share.



High-tech industry analysts for Brown & Associates, a money management firm specializing in fixed-income investments, have been closely following MediSoft ever since it went public three years ago. In general, portfolio managers at Brown & Associates do not participate in initial offerings of debt investments, preferring instead to see how the issue trades before considering taking a position in the issue. Since MediSoft's bonds have had ample time to trade in the marketplace, analysts and portfolio managers have taken an interest in the company's bonds. At a meeting to discuss the merits of MediSofVs bonds, the following comments were made by various portfolio managers and analysts at Brown & Associates:



"Choosing to invest in MediSoft's convertible bond would benefit our portfolios in many ways, but the primary benefit is the limited downside risk associated with the bond. Since the straight value will provide a floor for the value of the convertible bond, downside risk is limited to the difference between the market price of the bond and the straight value."



"Decreasing volatility in the price of MediSoft's common stock as well as increasing volatility in the level of interest rates are expected in the near future. The combined effects of these changes in volatility will be a decrease in the price of MediSoft's putable bonds and an increase in the price of the convertible bonds. Therefore, only the convertible bonds would be a suitable purchase."



Evaluate the portfolio managers' comments regarding the changes in the values of MediSoft's bonds resulting from changes in the volatility of the company's common stock and the volatility of interest rates. The managers were:

4. Michael Robbins, CFA, is analyzing Universal Home Supplies, Inc. (UHS), which has recently gone through some extensive restructuring.



Universal Home Supplies, Inc.



UHS operates nearly 200 department stores and 78 specialty stores in over 30 states. The company offers a wide range of products, including women's, men's, and children's clothing and accessories as well as home furnishings, electronics, and other consumer goods. The company is considering cutting back on or eliminating its electronics business entirely. UHS manufactures many of its own apparel products domestically in a large factory located in Kentucky. This central location permits shipping to distribution points around the country at reasonable costs. The company operates primarily in suburban shopping malls and offers mid- to high-end merchandise mainly under its own private label. At present more than 70% of the company's customers live within a 10-minute drive of one of the company's stores. Web site activity measured in dollar sales volume has increased by over 18% in the past year. Shares of UHS stock are currently priced at $25. Dividends are expected to grow at a rate of 6% over the next eight years and then continue to grow at that same rate indefinitely. The company has a cost of capital of 10.2%, a beta of 0.8, and just paid an annual dividend of $1.25.



UHS has faced serious cash flow problems in recent years as a consequence of its strategy to pursue an upscale clientele in the face of increased competition from several "niche retailers." The firm has been able to issue new debt recently and has also managed to extend its line of credit. The two financing agreements required a pledge of additional assets and a promise to install a super-efficient inventory tracking system in time to meet holiday shopping demand.











Robbins is asked by his supervisor to carefully consider the advantages and drawbacks of using the price-to-sales ratio (P/S) and to determine the appropriate valuation metrics to use when returns follow patterns of persistence or reversals.



Robbins also estimates a cross-sectional model to predict UHS's P/E:

predicted P/E = 5 - (10 x beta) + [3 x 4-year average ROE(%)]

+ [2 X 5-ycar growth forecast(%)]



Is UHS stock, at the end of 2008, best described as overvalued or undervalued according to the:

Trailing PEG ratio? P/S ratio?

5. Delicious Candy Company (Delicious) is a leading manufacturer and distributor of quality confectionery products throughout Europe and Mexico. Delicious is a publicly-traded firm located in Italy and has been in business over 60 years.



Caleb Scott, an equity analyst with a large pension fund, has been asked to complete a comprehensive analysis of Delicious in order to evaluate the possibility of a future investment.



Scott compiles the selected financial data found in Exhibit 1 and learns that Delicious owns a 30% equity interest in a supplier located in the United States. Delicious uses the equity method to account for its investment in the U.S. associate.





Scott reads the Delicious's revenue recognition footnote found in Exhibit 2.



Exhibit 2: Revenue Recognition Footnote

____________________________________________________________________________

in millions___________________________________________________________________

Revenue is recognized, net of returns and allowances, when the goods are shipped to customers and collectability is assured. Several customers remit payment before delivery in order to receive additional discounts. Delicious reports these amounts as unearned revenue until the goods are shipped. Unearned revenue was 7,201 at the end of 2009 and 5,514 at the end of 2008.



Delicious operates two geographic segments: Europe and Mexico. Selected financial information for each segment is found in Exhibit 3.







At the beginning of 2009, Delicious entered into an operating lease for manufacturing equipment. At inception, the present value of the lease payments, discounted at an interest rate of 10%, was 6300 million. The lease term is six years and the annual payment is 669 million. Similar equipment owned by Delicious is depreciated using the straight-line method and no residual values are assumed.



Scott gathers the information in Exhibit 4 to determine the implied "stand-alone" value of Delicious without regard to the value of its U.S. associate.







Using the data found in Exhibit 1 and Exhibit 4, Delicious's implied P/E multiple without regard to its U.S. associate is closest to:

6. Viper Motor Company, a publicly traded automobile manufacturer located in Detroit, Michigan, periodically invests its excess cash in low-risk fixed income securities. At the end of 2009, Viper's investment portfolio consisted of two separate bond investments: Pinto Corporation and Vega Incorporated.



On January 2, 2009, Viper purchased $10 million of Pinto's 4% annual coupon bonds at 92% of par. The bonds were priced to yield 5%. Viper intends to hold the bonds to maturity. At the end of 2009, the bonds had a fair value of $9.6 million.



On July I, 2009, Viper purchased $7 million of Vega's 5% semi-annual coupon mortgage bonds at par. The bonds mature in 20 years. At the end of 2009, the market rate of interest for similar bonds was 4%. Viper intends to sell the securities in the near term in order to profit from expected interest rate declines.



Neither of the bond investments was sold by Viper in 2009.



On January 1,2010, Viper purchased a 60% controlling interest in Gremlin Corporation for $900 million. Viper paid for the acquisition with shares of its common stock.



Exhibit 1 contains Viper's and Gremlin's pre-acquisition balance sheet data.







Exhibit 2 contains selected information from Viper's financial statement footnotes.







The carrying value of Viper's investment portfolio as of December 31, 2009 is closest to:

7. Michelle Norris, CFA, manages assets for individual investors in the United States as well as in other countries. Norris limits the scope of her practice to equity securities traded on U.S. stock exchanges. Her partner, John Witkowski, handles any requests for international securities. Recently, one of Norris's wealthiest clients suffered a substantial decline in the value of his international portfolio. Worried that his U.S. allocation might suffer the same fate, he has asked Norris to implement a hedge on his portfolio. Norris has agreed to her client's request and is currently in the process of evaluating several futures contracts. Her primary interest is in a futures contract on a broad equity index that will expire 240 days from today. The closing price as of yesterday, January 17, for the equity index was 1,050. The expected dividends from the index yield 2% (continuously compounded annual rate). The effective annual risk-free rate is 4.0811%, and the term structure is flat. Norris decides that this equity index futures contract is the appropriate hedge for her client's portfolio and enters into the contract.



Upon entering into the contract, Norris makes the following comment to her client:

"You should note that since we have taken a short position in the futures contract, the price we will receive for selling the equity index in 240 days will be reduced by the convenience yield associated with having a long position in the underlying asset. If there were no cash flows associated with the underlying asset, the price would be higher. Additionally, you should note that if we had entered into a forward contract with the same terms, the contract price would most likely have been lower but we would have increased the credit risk exposure of the portfolio."



Sixty days after entering into the futures contract, the equity index reached a level of 1,015. The futures contract that Norris purchased is now trading on the Chicago Mercantile Exchange for a price of 1,035. Interest rates have not changed. After performing some calculations, Norris calls her client to let him know of an arbitrage opportunity related to his futures position. Over the phone, Norris makes the following comments to her client:



"We have an excellent opportunity to earn a riskless profit by engaging in arbitrage using the equity index, risk-free assets, and futures contracts. My recommended strategy is as follows: We should sell the equity index short, buy the futures contract, and pay any dividends occurring over the life of the contract. By pursuing this strategy, we can generate profits for your portfolio without incurring any risk."



Which of the following best describes the movement of the futures price on the 240-day equity index futures contract as the contract moves toward the expiration date?

8. Galena Petrovich, CFA, is an analyst in the New York office of TRS Investment Management, Inc. Petrovich is an expert in the industrial electrical equipment sector and is analyzing Fisher Global. Fisher is a global market leader in designing, manufacturing, marketing, and servicing electrical systems and components, including fluid power systems and automotive engine air management systems.



Fisher has generated double-digit growth over the past ten years, primarily as the result of acquisitions, and has reported positive net income in each year. Fisher reports its financial results using International Financial Reporting Standards (IFRS).



Petrovich is particularly interested in a transaction that occurred seven years ago, before the change in accounting standards, in which Fisher used the pooling method to account for a large acquisition of Dartmouth Industries, an industry competitor. She would like to determine the effect of using the purchase method instead of the pooling method on the financial statements of Fisher. Fisher exchanged common stock for all of the outstanding shares of Dartmouth.



Fisher also has a 50% ownership interest in a joint venture with its major distributor, a U.S. company called Hydro Distribution. She determines that Fisher has reported its ownership interest under the proportioned consolidation method, and that the joint venture has been profitable since it was established three years ago. She decides to adjust the financial statements to show how the financial statements would be affected if Fisher had reported its ownership under the equity method. Fisher is also considering acquiring 80% to 100% of Brown and Sons Company. Petrovich must consider the effect of such an acquisition on Fisher's financial statements.



Petrovich determines from the financial statement footnotes that Fisher reported an unrealized gain in its most recent income statement related to debt securities that are designated at fair value. Competitor firms following U.S. GAAP classify similar debt securities as available-for-sale.



Finally, Petrovich finds a reference in Fisher's footnotes regarding a special purpose entity (SPE). Fisher has reported its investment in the SPE using the equity method, but Petrovich believes that the consolidation method more accurately reflects Fisher's true financial position, so she makes the appropriate adjustments to the financial statements.



Had Fisher Global reported its investment in the joint venture under the equity method rather than under the proportionate consolidation method, it is most likely that:

9. Michelle Norris, CFA, manages assets for individual investors in the United States as well as in other countries. Norris limits the scope of her practice to equity securities traded on U.S. stock exchanges. Her partner, John Witkowski, handles any requests for international securities. Recently, one of Norris's wealthiest clients suffered a substantial decline in the value of his international portfolio. Worried that his U.S. allocation might suffer the same fate, he has asked Norris to implement a hedge on his portfolio. Norris has agreed to her client's request and is currently in the process of evaluating several futures contracts. Her primary interest is in a futures contract on a broad equity index that will expire 240 days from today. The closing price as of yesterday, January 17, for the equity index was 1,050. The expected dividends from the index yield 2% (continuously compounded annual rate). The effective annual risk-free rate is 4.0811%, and the term structure is flat. Norris decides that this equity index futures contract is the appropriate hedge for her client's portfolio and enters into the contract.



Upon entering into the contract, Norris makes the following comment to her client:

"You should note that since we have taken a short position in the futures contract, the price we will receive for selling the equity index in 240 days will be reduced by the convenience yield associated with having a long position in the underlying asset. If there were no cash flows associated with the underlying asset, the price would be higher. Additionally, you should note that if we had entered into a forward contract with the same terms, the contract price would most likely have been lower but we would have increased the credit risk exposure of the portfolio."



Sixty days after entering into the futures contract, the equity index reached a level of 1,015. The futures contract that Norris purchased is now trading on the Chicago Mercantile Exchange for a price of 1,035. Interest rates have not changed. After performing some calculations, Norris calls her client to let him know of an arbitrage opportunity related to his futures position. Over the phone, Norris makes the following comments to her client:



"We have an excellent opportunity to earn a riskless profit by engaging in arbitrage using the equity index, risk-free assets, and futures contracts. My recommended strategy is as follows: We should sell the equity index short, buy the futures contract, and pay any dividends occurring over the life of the contract. By pursuing this strategy, we can generate profits for your portfolio without incurring any risk."



Determine the price of the futures contract on the equity index as of the inception date, January 18.

10. Alertron is a pharmaceutical company with approximately $3.5 billion in annual sales that specializes in the development, manufacturing, and marketing of neurology and oncology drug therapies. The firm is seeking to achieve more rapid growth, and Alertron's executive management team feels that the company can grow faster by making acquisitions than it can by trying to grow organically. As a result, management asks the firm's Director of Strategic Planning, Kanna Ozer, CFA, to analyze potential alternatives. At Alertron's next executive management team meeting, Ozer presents the report shown in Exhibit 1 concerning four potential acquisition targets:





Alertron's executive team agrees that the report is helpful for initiating discussion but decides they need more information concerning the form _of each potential acquisition and the most appropriate method of payment. Alertron's1 management is also concerned whether each potential target would view a takeover attempt as friendly or hostile. Paul Mussara, Alertron's CEO, asks Ozer to prepare a second report that specifically describes the transaction characteristics corresponding to each deal. Ozer's second report is shown in Exhibit 2.





As Alertron was conducting its analysis, Bhavik Kumar, CEO of Dillon Biotech, hears rumors that Alertron may attempt a hostile takeover of his firm. Kumar calls an emergency meeting with Dillon's four executive vice presidents and expresses his concern that Alertron may attempt a bear hug by submitting a merger proposal directly to the board without informing Dillon's management. Kumar concludes the emergency meeting by asking each executive vice president to brainstorm defense mechanisms that Dillon could employ before a takeover attempt is made and also defenses that could be employed after a hostile takeover offer.

After intense discussions, Alertron decides that a takeover offer for Carideo would be most beneficial due to the net present value of cost reduction synergies of $600 million that Ozer estimates would result from the merger. Mussara asks Ozer to evaluate the deal based on a stock offer in which Alertron would exchange 0.75 shares of Alertron stock for each outstanding share of Carideo stock. Ozer compiles the information shown in Exhibit 3 for her analysis.





Ozer, and the rest of the executive management team at Alertron, is extremely confident in the $600 million dollar estimate of cost reduction synergies that are likely to result from the merger and feel that the estimate may actually be conservative. However, when analysts at Carideo review the figures, they have a much different opinion and are less certain that $600 million worth of synergies could be realized. While Carideo believes the net present value of synergies from the deal would still be positive, its estimates are much lower than Alertron's



Carideo's management is also concerned that a merger between Alertron and Carideo could face scrutiny from regulators. Although neither firm is the largest in the pharmaceutical industry, their combined market power could raise antitrust concerns. Phillip Wu, an analyst with Carideo, compiles the following table showing the market share of each of the 12 firms in the pharmaceutical industry to determine whether the concerns were valid. Both Alertron's and Carideo's management teams decide that if regulators are unlikely to challenge the deal, they will proceed with the necessary steps to complete the merger.





Based on each firm's forecasts of the estimated NPV of synergies from a merger between Alertron and Carideo, what payment method is each firm likely to prefer in the deal?


 

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