CFA LEVEL II PRACTICE EXAM – PAPER 3 |
ADVANCED CASE-BASED PRACTICE QUESTIONS
WITH DETAILED SOLUTIONS | 2026 EDITION
Course Name
Chartered Financial Analyst (CFA) Level II
Level
Professional Certification – Advanced
Short Introduction
This original CFA Level II Practice Exam – Paper 3 is designed to reinforce
advanced analytical and valuation skills through challenging, case-based questions.
It covers key Level II curriculum areas, including Ethical and Professional
Standards, Financial Statement Analysis, Equity Valuation, Fixed Income,
Derivatives, Alternative Investments, Economics, Corporate Issuers, and Portfolio
Management. Each question includes a model answer and a detailed italicised
explanation to support effective revision.
Instructions
Answer all 40 questions.
Read each question and supporting information carefully.
Select the single best answer for multiple-choice questions.
Show calculations where appropriate.
Attempt all short-answer, application, and higher-order thinking questions
before reviewing the solutions.
Exam Structure
15 Multiple Choice Questions
10 Short Answer Questions
10 Application / Case Study Questions
, 5 Higher-Order Thinking Questions
Total Questions: 40
SECTION A – MULTIPLE CHOICE QUESTIONS
Question 1
An analyst estimates a firm's enterprise value using a Free Cash Flow to the Firm
(FCFF) model.
Which discount rate is most appropriate?
A. Cost of Equity
B. Weighted Average Cost of Capital (WACC)
C. Risk-Free Rate
D. Dividend Yield
Answer: B
Explanation: FCFF represents cash flows available to all providers of capital and
is therefore discounted using WACC.
Question 2
Which valuation approach is generally most appropriate for a mature company
with predictable dividend payments?
A. Residual Income Model
B. Dividend Discount Model
C. Asset-Based Valuation
D. Price-to-Sales Ratio
, Answer: B
Explanation: The Dividend Discount Model is most suitable for companies with
stable and predictable dividend policies.
Question 3
A bond has a modified duration of 6.5 years.
If market yields increase by 0.75%, the bond's price will most likely:
A. Increase by approximately 4.9%
B. Decrease by approximately 4.9%
C. Remain unchanged
D. Increase by approximately 0.75%
Answer: B
Explanation: Approximate price change = −Duration × Yield Change = −6.5 ×
0.75% ≈ −4.9%.
Question 4
A company reports consistently increasing earnings while operating cash flow
declines.
An analyst should primarily be concerned about:
A. Foreign exchange exposure
B. Earnings quality
C. Dividend policy
D. Capital structure
ADVANCED CASE-BASED PRACTICE QUESTIONS
WITH DETAILED SOLUTIONS | 2026 EDITION
Course Name
Chartered Financial Analyst (CFA) Level II
Level
Professional Certification – Advanced
Short Introduction
This original CFA Level II Practice Exam – Paper 3 is designed to reinforce
advanced analytical and valuation skills through challenging, case-based questions.
It covers key Level II curriculum areas, including Ethical and Professional
Standards, Financial Statement Analysis, Equity Valuation, Fixed Income,
Derivatives, Alternative Investments, Economics, Corporate Issuers, and Portfolio
Management. Each question includes a model answer and a detailed italicised
explanation to support effective revision.
Instructions
Answer all 40 questions.
Read each question and supporting information carefully.
Select the single best answer for multiple-choice questions.
Show calculations where appropriate.
Attempt all short-answer, application, and higher-order thinking questions
before reviewing the solutions.
Exam Structure
15 Multiple Choice Questions
10 Short Answer Questions
10 Application / Case Study Questions
, 5 Higher-Order Thinking Questions
Total Questions: 40
SECTION A – MULTIPLE CHOICE QUESTIONS
Question 1
An analyst estimates a firm's enterprise value using a Free Cash Flow to the Firm
(FCFF) model.
Which discount rate is most appropriate?
A. Cost of Equity
B. Weighted Average Cost of Capital (WACC)
C. Risk-Free Rate
D. Dividend Yield
Answer: B
Explanation: FCFF represents cash flows available to all providers of capital and
is therefore discounted using WACC.
Question 2
Which valuation approach is generally most appropriate for a mature company
with predictable dividend payments?
A. Residual Income Model
B. Dividend Discount Model
C. Asset-Based Valuation
D. Price-to-Sales Ratio
, Answer: B
Explanation: The Dividend Discount Model is most suitable for companies with
stable and predictable dividend policies.
Question 3
A bond has a modified duration of 6.5 years.
If market yields increase by 0.75%, the bond's price will most likely:
A. Increase by approximately 4.9%
B. Decrease by approximately 4.9%
C. Remain unchanged
D. Increase by approximately 0.75%
Answer: B
Explanation: Approximate price change = −Duration × Yield Change = −6.5 ×
0.75% ≈ −4.9%.
Question 4
A company reports consistently increasing earnings while operating cash flow
declines.
An analyst should primarily be concerned about:
A. Foreign exchange exposure
B. Earnings quality
C. Dividend policy
D. Capital structure
