Sample Level 2 CFA® Exam Questions:
Alternative Investments
Amanda and Sue are both level II CFA candidates. They decided to study together in order to be better prepared for the exam. After each reading, they both prepare a true/false test. Recently, they have covered the material on private equity valuation.
They have divided their test into six sessions, each including two statements: one prepared by Amanda and one prepared by Sue. Below, there are twelve statements made by the candidates:
Session 1
Statement 1: A greater use of debt by PE companies results in a transfer of risk to the debt buyer and an increase in the company’s efficiency.
Statement 2: PE companies characterized by a high leverage level benefit from an increased interest tax shield.
Session 2
Statement 3: One of the sources of value-added that a private equity firm provides to its portfolio companies is aligning the economic interests between the limited partners and portfolio managers.
Statement 4: Earn-outs are control mechanisms used in venture capital investments which are based on the relation between the exit price paid to the owners and the past performance of the portfolio company.
Session 3
Statement 5: Pre-money and post-money valuation are concepts related to valuation of venture capital investments.
Statement 6: Scenario analysis is used in both venture capital and buyout investments so as to estimate the investment’s terminal value.
Session 4
Statement 7: According to the LBO model, value creation comes from dividend growth, increase in multiples and debt reduction.
Statement 8: Management fees are paid annually as a percentage of assets under management and are directly tied to fund profits.
Session 5
Statement 9: Carried interest refers to the LP share in a fund’s profits, whereas ratchet is a mechanism that describes the portfolio company equity allocation to the shareholders and management.
Statement 10: Distribution waterfall refers to profit allocation between LPs and GPs.
Session 6
Statement 11: The J-Curve refers to a private equity investment return pattern which initially increases and, then, decreases as the exit nears.
Statement 12: Capital risk refers to the impact of changes in interest rates and currency exchange rates on private equity investments.
QUESTION 1
Which of the Session 1 statements is most likely correct?
- a. Statement 1
- b. Statement 2
- c. Statement 1 and Statement 2
QUESTION 2
Which of the Session 2 statements is least likely correct?
- a. Statement 3
- b. Statement 4
- c. Statement 3 and Statement 4
QUESTION 3
Which of the Session 3 statements is most likely correct?
- a. Statement 5
- b. Statement 6
- c. Statement 5 and Statement 6
QUESTION 4
Which of the Session 4 statements is least likely correct?
- a. Statement 7
- b. Statement 8
- c. Statement 7 and Statement 8
QUESTION 5
Which of the Session 5 statements is most likely correct?
- a. Statement 9
- b. Statement 10
- c. Statement 9 and Statement 10
QUESTION 6
Which of the Session 6 statements is least likely correct?
- a. Statement 11
- b. Statement 12
- c. Statement 11 and Statement 12