CFA Level 2 Exam 115 Questions with Answers 2023,100% CORRECT

CFA Level 2 Exam 115 Questions with Answers 2023 FCFF (using EBITDA) - CORRECT ANSWER FCFF = EBIDTA(1-T) + DEP(T) - Finv - Winv Converting FIFO to LIFO COGS - CORRECT ANSWER FIFO COGS = LIFO COGS - (End LIFO Rese ...

CFA Level 2 Exam 115 Questions with Answers 2023 FCFF (using EBITDA) - CORRECT ANSWER FCFF = EBIDTA(1-T) + DEP(T) - Finv - Winv Converting FIFO to LIFO COGS - CORRECT ANSWER FIFO COGS = LIFO COGS - (End LIFO Reserve - Beg LIFO reserve) Engle- Granger Test - CORRECT ANSWER Test whether 2 variables are cointegrated. Regress 1 data series against the other and check residuals for unit root. Steady State of Growth Formula - CORRECT ANSWER growth = Growth Rate TFP/1-(Labor cost in total factor cost) + labor force growth Labor productivity growth accounting Equation (Growth Rate in Potential GDP) - CORRECT ANSWER Growth rate in potential GDP = Long-Term growth rate of labor force + Long-term growth rate in labor productivity Neoclassical Model - CORRECT ANSWER Because of diminishing marginal returns to capital, the only way to sustain growth in potential GDP per capita is through technological change or growth in total factor productivity. a steady state rate of growth and diminishing marginal returns, which are tenets of neoclassical growth theory. Real Interest Rate - CORRECT ANSWER real = Nominal - Expected inflation rate Period Pension Cost (formula) US GAAP - CORRECT ANSWER Current Service Cost + Interest cost obligation - Expected Return on Assets + Plus amortization of past service cost + amortization actuarial gain/losses Total Periodic Pension Cost - CORRECT ANSWER Net Change in Liability of the plan - Employer Contributions or Interest Cost + Service Cost - Actual return on investments. Total value to paid (TVPI) - CORRECT ANSWER DPI + RVPI / Paid in Capital H-Model - CORRECT ANSWER V0= Do(1+GL) + DoH(gs-gL)/ r- GL FCFE using FCFF - CORRECT ANSWER FCFE = FCFF -Interest(1-T) + Net Borrowing Value of Long position in a forward contract - CORRECT ANSWER V = St - Forward Price (1+r)^(T-t) Synthetic Share (Put-Call Pariy) - CORRECT ANSWER Co=Po + So- X/(1+rf) Payout ratio - CORRECT ANSWER Payout ratio = 1- b (b= retention ratio) Justified leading P/E - CORRECT ANSWER 1-b/ r-g Justified trailing P/E - CORRECT ANSWER 1- b (1 + g)/ r-g Where (1-b) = Dividend payout ratio, G is LT Growth in Dividends Standard error of estimate - CORRECT ANSWER (Sse/n-2)^1\2 where Sse = Sum of squares residual F statistic - CORRECT ANSWER Msr/mse = RSS/k /SSE/n-(k+1) MSR = mean regression sum of squares MSE = mean squared error, SSE/(n - k + 1) RSS = regression sum of squares; the amount of variation in Y explained by the model SSE = sum of squared error from the regression model k = the number of regressors in the model n = the number of observations Portfolio standard deviation of return - CORRECT ANSWER Port var = var((1- p))/ n +p) p=correlation Post offer defeneses - CORRECT ANSWER Leveraged recapitalization, green mail Pre offer defenese - CORRECT ANSWER Supermajority voting provision, poison puts, fair price amendments, restricted voting rights, poison pills , staggerd board elections Post merger value of firm - CORRECT ANSWER V= Va + Vt + Synergies - Cash Hhi merger index - CORRECT ANSWER (% x 100)^2+ (%x 100)^2 Post merger between 1000 and 1800 moderately concentrated interests, change greater 100 challenge Forward contract formula - CORRECT ANSWER Fpt- FP(contract size)/ (1+r(days/360) FX Forward Premium Equation - CORRECT ANSWER Sp/b [(Actual/360)/1+Ib(Acutal/360)](ip-ib) Triangular Arbitrage Conditions - CORRECT ANSWER 1st the bid shown by a dealer in the interbank market cannot be higher than the current interbank offer, and the offer shown by a dealer cannot be lower than the current interbank bid. If the bid-offer quotes shown by a dealer are inconsistent with the interbank market quotes, other market participants will buy from the cheaper source and sell to the more expensive source. 2nd the cross-rate bids (offers) posted by a dealer must be lower (higher) than the implied cross-rate offers (bids) available in the interbank market. Recall that given exchange rate quotes for the currency pairs A/B and C/B, we can back out the implied cross rate of A/C, and that this implied cross-rate A/C must be consistent with the A/B and C/B rates. This again reflects the basic principle of arbitrage: If identical financial products are priced differently, then market participants will buy the cheaper one and sell the more expensive one until the price difference is eliminated. Profitability Index - CORRECT ANSWER PI = NPV/ Initial Investment >1 = invest AAR - CORRECT ANSWER Average Accounting Income / Average Book Value SMM - CORRECT ANSWER SMM = 1 - (1-CPR)^1/12 CPR - CORRECT ANSWER CPR = PSA benchmark x PSA/100 PSA Benchmark = .2% per month till month 30=6% thereafter. Predicted Interval - CORRECT ANSWER The predicted value for Monday's stock return is calculated as the sum of the intercept and slope term: 0.1428 - 0.1194 = 0.0234. Degrees of freedom = n - k - 1 = (30 years × 250 trading days per year) - 2 = 7498. Closest critical two-tailed t-statistic (at 5% significance level) = 1.96. Prediction interval = Predicted value ± (critical t-statistic × standard error of forecast) = 0.0234 ± (1.96 × 0.0612) = -0.09655 to +0.143352. confidence interval for a regression coefficient - CORRECT ANSWER coefficient ± the critical t-value X the coefficient standard error Cobb Douglas Production Function - CORRECT ANSWER Growth in potential GDP = Growth of total factor productivity + (share of labor × growth in labor) + (share of capital × growth in capital) Debt to Capital - CORRECT ANSWER Debt-to-equity divided by one plus debt-to-equity: 0.30 / (1 + 0.30). Beta Calculation Formula - CORRECT ANSWER Beta = CovP and M/ Var m Aggregate Accruals (Using CF Method) - CORRECT ANSWER Aggregate accruals using the cash flow method are calculated as net income minus cash flow from operation minus cash flow from investing activities. accrualsCF = NI − CFO − CFI Accrual Ratio - CORRECT ANSWER The accruals ratio using the balance sheet approach is: NOA end - NOA beg/ (AVG NOA (end + Beg/2 NOA = assets - cash/invest liab -short/long term notes Correlation Formula - CORRECT ANSWER Cov(x,y) / (sx)(sy) Estimated Slope Coefficient - CORRECT ANSWER Cov(x,y) / variance x Confidence interval for predicted Y value - CORRECT ANSWER Y+- Tt x SE of Forecast Discount Lack of Control - CORRECT ANSWER DLOC = 1 - (1/(1 + Control Premium)) Total Discount for DLOC and DLOM Formula - CORRECT ANSWER Total Discount = 1 - ((1 - DLOC)*(1 - DLOM) Coase theorem - CORRECT ANSWER The Coase theorem states that if an externality can be traded and there are no transaction costs, then the allocation of property rights will be efficient and the resource allocation will not depend on the initial assignment of property rights Years to repay debt from Operating Cashflows - CORRECT ANSWER Total Debt / Operating Cashflows - reinvestment reinvestment = Capex + Expenditures Intangibles Interest Coverage Ratio for Change in Classification of Lease - CORRECT ANSWER Revised EBIT = EBIT + Operating Lease Pmt - Depreciation from capitalization of Lease Revised Int Exp = Int Exp + Int Exp from Capitalization of Lease Revised EBIT / Revised Int Exp Allocation of capital expenditures on a growth basis - CORRECT ANSWER ratio of capital expenditure percentage to total asset percentage should be calculated for each segment:if greater than 1, it indicates that a segment is being allocated a greater proportion of capital expenditures than its proportion of total assets and the company is therefore growing the segment. % Total Capital Expenditures / % of Total Assets Determining if regression coefficient is significantly different from zero with respect to the coefficient(s) - CORRECT ANSWER Coefficient / Std Error = T Stat compare T stat to critical value 1.97 can reject null hypothesis if greater than 1.97 Justified P/B - CORRECT ANSWER roe - r / r-g Interest Coverage Ratio - CORRECT ANSWER EBIT / Interest Expense Adjusted Interest Coverage Ratio for Capitalized Lease - CORRECT ANSWER EBIT + Lease Exp - New Dep (Cap Lease) / Int Exp + New Int (Cap Lease) Asset Turnover Ratio - CORRECT ANSWER Sales / Total Assets Real Estate Cap Rate - CORRECT ANSWER Cap Rate = Discount Rate - Growth Rate Synthetic Call - CORRECT ANSWER Co = Po + Stock - bond/ 1+ R ROE using Dupont Method - CORRECT ANSWER ROE = Net Profit Margin (NI / Revenue) x Asset Turnover x financial leverage cash-flow-based accruals ratio - CORRECT ANSWER cash-flow-based accruals ratio = [NI - (CFO + CFI)]/(Average NOA) Lower ratio = better earnings quality. Multifactor model - CORRECT ANSWER actual - expected, inputs into model factor model. Estimated Beta - CORRECT ANSWER Covariance / variance of the mkt returns Calc FCFF using NI - CORRECT ANSWER FCFF = NI + NCC + Int(1 - Tax rate) - FCInv - WCInv Calc FCFE using FCFF - CORRECT ANSWER FCFE = FCFF - Interest (1 - T) + Net borrowing Calc FCFE using NI - CORRECT ANSWER FCFE = Net income - (1 - DR) × (FCInv - Depreciation) - (1 - DR) × (WCInv) where DR = debt ratio, which is 40% FCInv = investment in fixed capital, which is 30% of EPS WCInv = investment in working capital, which is 10% of EPS Current Rate Method - CORRECT ANSWER Functional Current not = to Reporting Currency All assets and liabilities translated at current rates All revenues and expenses translated at average rates RE and Common Stock use Historic rates Temporal Method - CORRECT ANSWER Functional currency = Reporting Currency All monetary assets (Cash,inv, AR/ AP) translated current rates Non monetary assets (PPE, INV) translated at historical rates RE and CS use historic rates Revenue - avg rate expense - avg rate cogs - historic rate depreciation - historic rate Adjusted Return on Assets for LIFO to FIFO - CORRECT ANSWER NI + increase LIFO Reserve - Tax of Chg LIFO Reserve / Total Assets + LIFO Reserve - Tax Increase LIFO reserve - Tax remaining LIFO Reserve at rate. Consolidation method - CORRECT ANSWER In consolidation, companies combine all of the assets, liabilities, revenues, and expenses of subsidiaries with the parent. Joint Control - CORRECT ANSWER Under US GAAP must use equity method. Justified Price to Sales (Formula) - CORRECT ANSWER P/S = Eo/So x (1-b)(1+g) / r - g E0/S0 = the business's long-term profit margin = 8.0% (1-b) = the projected payout ratio = 0.20 real required rate of return (formula) - CORRECT ANSWER Real required rate of return = Country return + Industry adjustment + Size adjustment - Leverage adjustment Real country return 8.60% + Industry 1.60% + Size 1.45% - Leverage -0.85% Required rate of return 10.80% To measure risk in credit model - CORRECT ANSWER Time Value of Money, risk premium, and recovery rate Structual model - CORRECT ANSWER A key insight of the structural model is that holding the company's equity is economically equivalent to owning a European call option on the company's assets. (3) assumptions 1- the company's assets trade in frictionless markets that are arbitrage free, 2- the riskless rate of interest, r, is constant over time, and 3 - the time T value of the company's assets has a lognormal distribution with mean uT and variance σ2T. Reduced form model - CORRECT ANSWER Default probabilities and loss given default can be modeled as a function of the state of the economy, but whether the company actually defaults is an idiosyncratic risk. The model values risky corporate debt using risk-neutral probabilities and a risk-free rate of interest that is stochastic.Reduced form models make the following assumptions: The company's zero-coupon bond trades in frictionless markets that are arbitrage free; The riskless rate of interest, rt, is stochastic; The state of the economy can be described by a vector of stochastic variables Xt that represent the macroeconomic factors influencing the economy at time t; The company defaults at a random time t, where the probability of default over [t,t + Δ] when the economy is in state Xt is given by λ(Xt)Δ; Given the vector of macroeconomic state variables Xt, a company's default represents idiosyncratic risk; and Given default, the percentage loss on the company's debt is 0 ≤ ι(Xt) ≤ 1. Debt to total assets = D/E - CORRECT ANSWER Debt to total assets = 0.6 then D/E = 0.6/0.4 Proposition 1 Modigliani-Miller - CORRECT ANSWER Proposition I states that a firm's leverage does not affect its value Proposition 2 Modigliani-Miller - CORRECT ANSWER Proposition II—debt is less expensive than equity because of seniority (ignoring distress costs). To keep the cost of capital the same for the firm no matter the capital structure (i.e., consistency with Proposition I), equity must become more expensive as the proportion of debt is increased within the capital structure. After-tax operating cash flow(CF) - CORRECT ANSWER CF = (Sales - Cash operating expenses) x (1-tax rate) +(Depreciation x tax rate) Economic Profit - CORRECT ANSWER EP = NOPAT - $WACC or EBIT(1-Tax rate) - WACC x Capital Determining the Real Cost of Equity - CORRECT ANSWER Nominal cost of equity = rf + Beta x Market Premium Real cost of equity = (1+nomianl cost of equity) / (1+ inflation rate) - 1 FP calculation - CORRECT ANSWER Forward price = (Stock price - Present value of dividends over life of contract) × (1 + r)T. Gamma - CORRECT ANSWER Gamma is a measure of the sensitivity of delta to a change in the stock price. A larger gamma means that there is more uncertainty as to whether the call option will expire out of the money. Gamma is largest for options that are at the money near maturity because of the uncertainty about whether the option will expire (1) in the money (delta is 1.0) or (2) out of the money (delta is 0.0). Delta - CORRECT ANSWER Black-Scholes model - CORRECT ANSWER call options and put options because both will increase in value should implied volatility rise to match the level of historical volatility. Payer swaption - CORRECT ANSWER A payer swaption allows the holder to enter into a swap as the fixed-rate payer and floating-rate receiver. Entering into a payer swaption provides a simultaneous benefit—Yorktown owns the option to enter into a pay-fixed swap should rates increase, but it may choose not to enter into the pay-fixed swap should rates not increase. Plain vanilla swap - CORRECT ANSWER A plain vanilla swap is simply an interest rate swap in which one party pays a fixed rate and the other pays a floating rate, with both sets of payments in the same currency. In fact, the plain vanilla swap is probably the most common derivative transaction in the global financial system. Receiver swaption - CORRECT ANSWER A receiver swaption allows the holder to enter into a swap as the fixed-rate receiver and floating-rate payer. Therefore, these terms refer to the fixed rate and are comparable to the terms call and put used for other types of options. Although it is not apparent at this point, a payer swaption is a put and a receiver swaption is a call. FRA Formula - CORRECT ANSWER Foward price to sell Foreign Fx - CORRECT ANSWER Inventory Turnover Ratio - CORRECT ANSWER Cogs / Avg Inventory Adjusted R2 - CORRECT ANSWER Adjusted R2 adjusts for the loss of degrees of freedom when additional independent variables are added to a regression. It does not adjust for the effects of serial correlation in the data, nor does it adjust for heteroskedasticity. presence of heteroskedasticity - CORRECT ANSWER The presence of heteroskedasticity is indicated when there is a systematic relationship between the residuals and the independent variable. The graph in Exhibit 2 displays no systematic relationship. Therefore, heteroskedasticity does not appear to be a problem in this regression. Durbin-Watson statistic - CORRECT ANSWER Significantly large values of the Durbin-Watson statistic point to negative serial correlation. Specifically, if the DW statistic exceeds 4 - dl, where dl is the lower critical value of the Durbin-Watson test, there is significant negative serial correlation. In this case, Durbin-Watson = 3.97 and dl = 1.65. Because 3.97 > [4 - 1.65], the test indicates that there is significant negative serial correlation. Mean Reverting Level - CORRECT ANSWER bo / 1- b1 presence of conditional heteroskedasticity - CORRECT ANSWER means that the variance of the error term is correlated with the values of the independent variables. Calculated value for T statistic - CORRECT ANSWER t = (Coefficient - Null Hypothesis) / std error std error = coefficient / t stat Confidence interval - CORRECT ANSWER Coefficient (from Reg model) +- Tstat(fromTable) x std error Multicollinearity - CORRECT ANSWER Multicollinearity occurs when two or more independent variables (or combinations of independent variables) are highly (but not perfectly) correlated. Correlation between independent variables may be a reasonable indication of multicollinearity in cases in which the regression contains only two independent variables. Significant T statistic suggests multicollinearity is not a problem. P Value - CORRECT ANSWER The p-value is the smallest level of significance at which the null hypothesis can be rejected. Residual Income Model - CORRECT ANSWER Vo = current BV per share + sum of (Et - cost of equity x expected per share BV) / (1+r)^t Clean Surplus Relation - CORRECT ANSWER End BV = Beg BV + Earnings - Dividends Residual Income model - CORRECT ANSWER Bo + Sum (ROE -r) x Beg BV / (1+r) ^t Justified Price to Book - CORRECT ANSWER (roe - g) / (r-g) Single Stage Residual Income - CORRECT ANSWER Bo + (roe -r)/(r-g) x Bo When is Residual Income model appropriate - CORRECT ANSWER company does not pay a dividend. Free cash flow is expected to be negative, Uncertainty in forecasting terminal values using alternative valuation approaches. Formula to calculate change in stock price due to dividend payment. - CORRECT ANSWER Pw - Px = D × [(1 - TD)/(1 - TCG)] Pw = stock price prior to dividend and eligible for dividend Px = stock price after dividend Pw - Px = $0.68 D = amount of dividend ($1.00) TCG = marginal capital gains tax (23%) TD = marginal dividend tax (?) Determine the cost of equity at the proposed debt level - CORRECT ANSWER According to Modigliani-Miller Proposition II, in the presence of taxes re = r0 + (r0 - rd) (1 - t) D/E (Equation 9) r0 =unlevered cost of equity Internal credit enhancement - CORRECT ANSWER senior/subordinated structures, reserve funds, and overcollateralization External credit enhancement - CORRECT ANSWER prepayment lockouts, prepayment penalty points, yield maintenance charges, and defeasance. Self regulated organizations SROs - CORRECT ANSWER Do not rely on Government funding, Some SRO are empowered to enforce laws. Regulatory Capture - CORRECT ANSWER Regulated companies' efforts to fight particular regulations tend to attract more public attention than when the companies are sympathetic to the contemplated regulations. Even more fundamentally, academics have argued that regulation often arises to enhance the interests of the regulated, often called the "regulatory capture" theory. For example, regulatory actions and determinations can restrict potential competition and coordinate the choices of rivals. Classical Growth Theory Model - CORRECT ANSWER growth rate of real GDP per person is temporary because of population explosion Period Pension Expense - IFRS - CORRECT ANSWER Current Service + Interest Cost - Expected Return + Past service cost Inventory Turnover Ratio - CORRECT ANSWER COGS / Avg Inventory Random Walk - CORRECT ANSWER random walks will have an estimated intercept coefficient near zero and an estimated slope coefficient on the first lag near 1 Adjusted R^2 - CORRECT ANSWER Adjusted R2 adjusts for the loss of degrees of freedom when additional independent variables are added to a regression. Structual model Strength and weakness - CORRECT ANSWER Structural Model Strengths It provides an option analogy for understanding a company's default probability and recovery rate. It can be estimated using only current market prices. Structural Model Weaknesses The default probability and recovery rate depend crucially on the assumed balance sheet of the company, and realistic balance sheets cannot be modeled. Its credit risk measures can be estimated only by using implicit estimation procedures because the company's asset value is unobservable. Its credit risk measures are biased because implicit estimation procedures inherit errors in the model's formulation. The credit risk measures do not explicitly consider the business cycle. Reduced Form Strength and Weakness - CORRECT ANSWER Reduced form models make the following assumptions: The company's zero-coupon bond trades in frictionless markets that are arbitrage free; The riskless rate of interest, rt, is stochastic; The state of the economy can be described by a vector of stochastic variables Xt that represent the macroeconomic factors influencing the economy at time t; The company defaults at a random time t, where the probability of default over [t,t + Δ] when the economy is in state Xt is given by λ(Xt)Δ; Given the vector of macroeconomic state variables Xt, a company's default represents idiosyncratic risk; and Given default, the percentage loss on the company's debt is 0 ≤ ι(Xt) ≤ 1.