CFA® Exam: Level 2 Sample Questions

IQ Partners is a small advisory boutique located in Paris, France, and founded in 1999 by Sam Tsui and Giselle Pout, both CFA charterholders. Before they started IQ Partners, Tsui and Pout, worked as consultants for one of the largest national investment banks. Thanks to this experience, they possess wide knowledge about various economic and investment concepts. They are also fond of strong ethical attitude. The key activities of IQ Partners include company valuations, mainly for M&A purposes, and weekend financial markets and valuation theories classes. Sam Tsui and Giselle Pout are well-known community organizers and speak in many conferences and seminars devoted to equity valuation and lead training sessions both for students and professionals.

At the Annual Conference of Financial Analysts held in Marseilles, Tsui and Pout give an outstanding lecture on valuation theories and models. During the lecture, they explain some of the concepts related to the analysis of the market in detail. One of the explained concepts is Porter's five forces, which draw a lot of attention and interest during the Q&A session held at the end of the lecture. One of the participants asks: "Which of Porter's five forces is the least accurate choice to determine the profitability of an industry?" During the Q&A session, there are also many questions about the use of two- and three-stage valuation models. One of the questions is: "Which of the models should be used to value a company for which its growth phase falls into 2 stages: H-model, Gordon growth model or multiple-based model?"

After the lecture, one of the rising stars of capital markets in France – Jérôme LeBlanc – approaches Tsui and asks him a couple of questions about sustainable growth rate and ways of its estimation. Furthermore, he asks Tsui whether he would recommend any of the implementations of the residual income. Since Tsui is already in a hurry, he just mentions something about the economic value added.

Next day after the conference, Tsui and Pout are back in the IQ Partners office for work. On the schedule, there are two valuation cases pending: for the Trino corporation (to be led by Pout) and for the Bioshock company (assigned to Tsui). The deadline for both is the end of the week.

Given the following data (Table 1) and using the P/E multiple and dividend discount model, Pout should estimate Trino's terminal value at the end of Year 5.

Table 1. Financial data for the Trino corporation

Financial measure	Value
EPS for Year 5	USD 33
Retention rate perpetually	65%
Required return perpetually	10%
ROE perpetually	6%
Forecasted trailing P/E in Year 5	7
Forecasted leading P/E in Year 5	7.27

Tsui is about to value the Bioshock company, which trades energy on the EEX. Tsui is about to value the free cash flow to equity in Year 2 using the following data (Table 2).

Table 2. Financial data for the Bioshock company

Financial measure in Year 2 (per share)	Value
Net income	USD 7.2
CAPEX	USD 3.1
Working capital	USD 2.9
Change in working capital	USD 1.2
Accumulated depreciation	USD 8.1
Depreciation expense	USD 1.3
Target debt ratio	32%

QUESTION 1

Which of the models mentioned during the post-lecture Q&A session is the most accurate for the valuation of a company for which growth falls into 2 stages?

• a. H-model
• b. Multiple-based model
• c. Gordon growth model

QUESTION 2

After the presentation of Porter’s five forces one of the participants asks a question. What is the least accurate answer?

• a. Threat of substitutes
• b. Industry average of ROE
• c. Rivalry among existing competitors

QUESTION 3

Concerning the question asked by Jérôme LeBlanc – the rising star of the French capital market – sustainable growth rate is least likely equal to:

• a. financial leverage multiplied by ROA.
• b. earnings retention rate multiplied by ROE.
• c. earnings retention rate multiplied by rate of return expected to be earned on new investments.

QUESTION 4

In order to provide LeBlanc with the correct formula for calculating EVA, we should start from net operating profit after taxes and deduct:

• a. change in working capital.
• b. change in capital expenditures.
• c. total capital multiplied by its cost.

QUESTION 5

Terminal value of the Trino corporation at the end of Year 5 using a P/E multiple approach and a DDM approach is closest to:

• a. USD 231 and USD 189, respectively.
• b. USD 231 and USD 197, respectively.
• c. USD 240 and USD 189, respectively.

QUESTION 6

Using the data provided in Table 2, decide which of the following is the most accurate estimation of Bioshock’s FCFE in Year 2?

• a. USD 4.48.
• b. USD 5.16.
• c. USD 11.24.

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