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. Using the backward induction method and the data in Exhibit 2, the value of the bond Hake has been asked to value is closest to:
. Find prices one period from the end. Value at Year 2: 0.5 × [(104/1.0450) + (104/1.0450)] + 4 = 103.522 0.5 × [(104/1.0325) + (104/1.0325)] + 4 = 104.726 0.5 × [(104/1.0235) + (104/1.0235)] + 4 = 105.612 Find prices two periods from the end. Time 1 values are the average of Time 2 dis- counted plus the coupon payment. 0.5 × [(103.522/1.0360) + (104.726/1.0360)] + 4 = 104.506 0.5 × [(104.726/1.0260) + (105.612/1.0260)] + 4 = 106.504 Find prices at Time 0. There is no coupon paid in this node. 0.5 × [(104.506/1.029) + (106.504/1.029)] = 102.532 because the discount rate used is an average across time. because the calculation omits the 4 coupon in the last period.
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2. In sharing her research material with the subject companies, LeCompte most likely violated CFA Institute Research Objectivity Standards with respect to her report(s) on:
LeCompte violated Requirement 6, Relationships with Subject Companies, by sharing the full research report with NanoMem. Sharing any section of a research report that might communicate the analyst’s proposed recommendation, rating, or price target is prohibited by the Research Objectivity Standards. Sharing historical factual information, on the other hand, is not a violation. LeCompte shared with UniFlash management only the part of her report on UniFlash that provides factual information.
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3. The mark-to-market value for Drawbridge’s forward position is closest to:
. 1 Drawbridge sold AUD 5 million forward to the settlement date at an all-in forward price of 0.8940 (USD/AUD). 2 To mark the position to market, Drawbridge offsets the forward transaction by buying AUD 5 million three months forward to the settlement date. 3 For the offsetting forward contract, because the AUD is the base currency in the USD/AUD quote, buying AUD forward means paying the offer for both the spot rate and forward points. I. The all-in three-month forward rate is calculated as 0.9066 – 0.00364 = 0.90296 II. This gives a net cash flow on settlement day of 5,000,000 × (0.8940 – 0.90296) = –USD44,800 (This is a cash outflow because Drawbridge sold the AUD for- ward and the AUD appreciated against the USD). 4 To determine the mark-to-market value of the original forward position, calculate the present value of the USD cash outflow using the three-month USD discount rate: –USD44,8000/[1 + 0.0023(90/360)] = –USD44,774. . The present value of the cash flow was not calculated (step 4 of calculation). . The cash flow was calculated using the bid rate instead of the offer rate. 1 The all-in three-month forward rate = 0.9062 – 0.00368 = 0.90252 2 This gives a net cash flow on settlement day of 5,000,000 × (0.8940 – 0.90252) = – USD42,600, and the present value is calculated as –USD42,600/[1 + 0.0023(90/360)] = –USD42,576.
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4. Which of the statements made by the member of the Board of Directors is most accurate?
Initial market reaction is an important barometer for the value investors place on the gains from merging as well as an indication of future returns. A spin-off does not generate cash for the parent company. The more of the merger that is paid for by stock, the more that the risks and benefits of realizing these synergies (assuming they really exist) will be passed on to the target shareholders—hence a lower benefit will result if more stock is used.
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5. In her response to Silverman regarding the characteristics of the three valuation approaches, Lin is least likely correct with respect to the:
. Although Lin is correct that the DCF method takes into account the cash flows that investors care about, she is not correct in stating that DCF takes into account the cyclical nature of the real estate market. . Lin is correct about the cost approach. . Lin is correct about the sales comparison approach.
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