Free CFA Institute CFA-Level-II Exam Questions

Emily De Jong, CFA, works for Charles & Williams Associates, a medium-sized investment firm operating in the northeastern United States. Emily is responsible for producing financial reports to use as tools to attract new clients. It is now early in 2009, and Emily is reviewing information for O'Connor Textiles and finalizing a report that will be used for an important presentation to a potential investor at the end of the week.Following an acquisition of a major competitor in 1992, O'Connor went public in 1993 and paid its first dividend in 1999. Dividends are paid at the end of the year. After 2008, dividends are expected to grow for three years at 11%: $2.13 in 2009, $2.36 in 2010, and $2.63 in 2011. The average of the arithmetic and compound growth rates are given in Exhibit 1. Dividends are then expected to settle down to a long-term growth rate of 4%. O'Connor's current share price of $70 is expected to rise to $72.92 by the end of the year according to the consensus of analysts' forecasts.O'Connor's annual dividend history is shown in Exhibit 1.De Jong is also considering whether or not she should value O'Connor using a free cash flow model instead of the dividend discount model.The output from the regression appears in Exhibit 2.De Jong determines that employing the CAPM to estimate the required return on equity suffers from the following sources of error:* Estimation of the model's inputs (e.g., the market risk premium). The company's dividend payment schedule.* The accuracy of the beta estimate.* Whether or not the model is the appropriate one to use.De Jong observes that two reputable statistical analysis firms estimate betas for O'Connor stock at 0.85 and 1.10. She concludes that the differences between her beta estimate and the published estimates resulted from her use of standard errors in her regression to correct for serial correlation; the other firms did not make a similar adjustment.De Jong considers using adjusted beta in her analysis. Typically, her company uses 1/3 for the value of .She determines that her adjusted beta forecast will be closer to the mean reverting level using this value than it would be using a value of 1/3.Is De Jong correct with respect to her conclusions regarding the causes of the differences between her beta estimate for O'Connor and the published beta estimates, and her strategy for adjusting her beta estimate to more quickly approach the mean reverting level of beta?

Henke Malfoy, CFA, is an analyst with a major manufacturing firm. Currently, he is evaluating the replacement of some production equipment. The old machine is still functional and could continue to serve in its current capacity for three more years. Tf the new equipment is purchased, the old equipment (which is fully depreciated) can be sold for $50,000. The new equipment will cost $400,000, including shipping and installation. If the new equipment is purchased, the company's revenues will increase by $175,000 and costs by $25,000 for each year of the equipment's 3-year life. There is no expected change in net working capital.The new machine will be depreciated using a 3-year MACRS schedule (note: the 3-year MACRS schedule is 33.0% in the first year, 45% in the second year, 15% in the third year, and 7% in the fourth year). At the end of the life of the new equipment (i.e., in three years), Malfoy expects that it can be sold for $10,000. The firm has a marginal tax rate of 40%, and the cost of capital on this project is 20%. In calculation of tax liabilities, Malfoy assumes that the firm is profitable, so any losses on this project can be offset against profits elsewhere in the firm. Malfoy calculates a project NPV of-$62,574.Suppose for this question only that Malfoy has forgotten to reflect a decrease in inventory that will result at the beginning of the project. The most likely effect on estimated project NPV of this error:

Maria Harris is a CFA Level 3 candidate and portfolio manager for Islandwide Hedge Fund. Harris is commonly involved in complex trading strategies on behalf of Islandwide and maintains a significant relationship with Quadrangle Brokers, which provides portfolio analysis tools to Harris. Recent market volatility has led Islandwide to incur record-high trading volume and commissions with Quadrangle for the quarter. In appreciation of Islandwide's business, Quadrangle offers Harris an all-expenses-paid week of golf at Pebble Beach for her and her husband. Harris discloses the offer to her supervisor and compliance officer and, based on their approval, accepts the trip.Harris has lunch that day with C. K. Swamy, CFA, her old college roommate and future sister-in-law. While Harris is sitting in the restaurant waiting for Swamy to arrive, Harris overhears a conversation between the president and chief financial officer (CFO) of Progressive Industries. The president informs the CFO that Progressive's board of directors has just approved dropping the company's cash dividend, despite its record of paying dividends for the past 46 quarters. The company plans to announce this information in about a week. Harris owns Progressive's common stock and immediately calls her broker to sell her shares in anticipation of a price decline.Swamy recently joined Dillon Associates, an investment advisory firm. Swamy plans to continue serving on the board of directors of Landmark Enterprises, a private company owned by her brother-in-law, for which she receives $2,000 annually. Swamy also serves as an unpaid advisor to the local symphony on investing their large endowment and receives four season tickets to the symphony performances.After lunch, Alice Adams, a client, offers Harris a 1 -week cruise as a reward for the great performance of her account over the previous quarter. Bert Baker, also a client, has offered Harris two airplane tickets to Hawaii if his account beats its benchmark by more than 2% over the following year.Juliann Clark, a CFA candidate, is an analyst at Dillon Associates and a colleague of Swamy's. Clark participates in a conference call for several analysts in which the chief executive officer at Dex says his company's board of directors has just accepted a tender offer from Monolith Chemicals to buy Dex at a 40% premium over the market price. Clark contacts a friend and relates the information about Dex and Monolith. The friend promptly contacts her broker and buys 2,000 shares of Dex's stock.Ed Michaels, CFA, is director of trading at Quadrangle Brokers. Michaels has recently implemented a buy program for a client. This buy program has driven up the price of a small-cap stock, in which Islandwide owns shares, by approximately 5?cause the orders were large in relation to the average daily trading volume of the stock. Michaels' firm is about to bring shares of an OTC firm to market in anIPO. Michaels has publicly announced that, as a market maker in the shares, his trading desk will create additional liquidity in the stock over its first 90 days of trading by committing to minimum bids and offers of 5,000 shares and to a maximum spread of one-eighth.Carl Park, CFA, is a retail broker with Quadrangle and has been allocated 5,000 shares of an oversubscribed IPO. One of his clients has been complaining about the execution price of a trade Park made for her last month, but Park knows from researching it that the trade received the best possible execution. In order to calm the client down. Park increases her allocation of shares in the IPO above what it would be if he allocated them to all suitable client accounts based on account size. He allocates a pro rata portion of the remaining shares to a trust account held at his firm for which his brother-in-law is the primary beneficiary.Has Michaels violated Standard 11(B) Integrity of Capital Markets: Manipulation with respect to any of the following?

William Rogers, a fixed-income portfolio manager, needs to eliminate a large cash position in his portfolio. He would like to purchase some corporate bonds. Two bonds that he is evaluating are shown in Exhibit I. These two bonds are from the same issuer, and the current call price for the callable bond is 100. Assume that the issuer will call if the bond price exceeds the call price.Rogers is also concerned about increases in interest rates and is considering the purchase of a putable bond. He ants to determine how assumed increases or decreases in interest rate volatility affect the value of the straight bonds and bonds with embedded options. After Rogers performs some analysis, he and his supervisor, Sigourney Walters, discuss the relative price movement between the two bonds in Exhibit 1 when interest rates change significantlyDuring the discussions, Rogers makes the following statements:Statement 1: If the volatility of interest rates decreases, the value of the callable bond will increase.Statement 2: The noncallable bond will not be affected by a change in the volatility or level of interest rates.Statement 3: When interest rates decrease, the value of the noncallable bond increases by more than the callable bond.Statement4: If the volatility of interest rates increases, the value of the putable bond will increase.Walters mentors Rogers on bond concepts and then asks him to consider the pricing of a third bond. The third bond has five years to maturity, a 6% annual coupon, and pays interest semiannually. The bond is both callable and putable at 100 at any time. Walters indicates that the holders of the bond's embedded options will exercise if the option is in-the-money.Rogers obtained the prices shown in Exhibit b using software that generates an interest rate lattice. He uses his software to generate the interest rate lattice shown in Exhibit 2.Exhibit 2: Interest Rate Lattice (Annualized Interest Rates)For this question only, ignore the information from Exhibit 1 and any other calculations in other questions. Rather, assume that the interest rate lattice provided in Exhibit 2 is constructed to be arbitrage-free. However, when Rogers calculates the price of the callable bond using the interest rates in the lattice, he gets a value higher than the market price of the bond.Is the price of the third callable and putable bond likely to be less than, equal to, or greater than 100%, and is the option-adjusted spread (OAS) on the callable bond likely to be zero, positive, or negative?

Martin Hagemann, CFA, works for a large brokerage firm in Frankfurt, Germany. Hagemann has been hired by Tryssen AG, a global research-based company that is preparing to go public after a long history of operating privately. The need to raise substantial amounts of capital to fund research and development activities is seen as the key motivation for the change in policy. Tryssen is engaged in the discovery, development, manufacture, marketing, and sale of medical products.Hagemann's first task is to recommend an exchange upon which Tryssen stock can be traded. One possibility is the Deutsche Bourse. The Deutsche Bourse operates primarily as a continuous order-driven system. Another alternative that Tryssen is considering is to list on a different exchange that operates as a price-driven system.As an alternative, Tryssen may choose to list as an American Depository Receipt (ADR). ADRs are negotiable U .S . securities that usually represent a non-U .S . based company's publicly traded equity. Although typically denominated in U .S . dollars, depository receipts can also be denominated in euros. Depository receipts can be eligible to trade on all U .S . stock exchanges as well as on many European stock exchanges.The increasing demand for depository receipts is driven by the desire of individual and institutional investors to diversify their portfolios, reduce risk and invest internationally in the most efficient manner possible. While most investors recognize the benefits of global diversification, there are many challenges presented when investing directly in local trading markets. Obstacles can include inefficient trade settlements, uncertain custody services, and costly currency conversions. Depository receipts overcome many of the inherent operational and custodial hurdles inherent in international investing. Tryssen has decided to access the U .S . market by involving itself in an ADR program. Tryssen has decided to save itself a lot of trouble, however, by not complying with SEC registration and reporting requirements.As an alternative to ADRs, investors interested in increasing their exposure to international investments can choose to acquire exchange traded funds (ETFs). Hagemann researches the advantages and disadvantages of ETFs.Execution costs are always a concern, and perhaps even more so for international investors. At the present time, Tryssen AG is most concerned with how reliably it can estimate trading costs. As part of the cost estimation process, Hagemann is asked to provide a report on the advantages and disadvantages of techniques used to reduce execution costs.Trysse AG proceeds to list on the Frankfurt exchange, and a U .S . affiliate of Hagemann's company starts to aggressively promote the stock. A U .S . investor buys 200 shares of Tryssen at a price of 20 per share. At time of purchase, the exchange rate is 1 = $1.15. One month later Tryssen pays a dividend of 0.25 per share, and investors are subject to a withholding tax of 20%. The U .S . investor is eligible to claim a tax credit of $0.06 per share. At the time the dividend was paid, the shares had jumped to 24 each and the U .S . dollar had weakened to 1 = $ 1.20. The shares were sold just after the dividend was paid.Which of the following best describes a comparative advantage of a price-driven system over an order-driven system?