CFA LEVEL II PRACTICE EXAM – PAPER 2 |
ADVANCED MOCK EXAM WITH VERIFIED ANSWERS
& DETAILED EXPLANATIONS | CASE-BASED
PRACTICE QUESTIONS | 2026 EDITION
Course Name
Chartered Financial Analyst (CFA) Level II
Level
Professional Certification – Advanced
Short Introduction
This original CFA Level II Practice Exam – Paper 2 is designed to strengthen
advanced analytical and valuation skills required for the CFA Level II
examination. It includes original exam-style questions covering Ethical and
Professional Standards, Quantitative Methods, Economics, Financial Statement
Analysis, Corporate Issuers, Equity Valuation, Fixed Income, Derivatives,
Alternative Investments, and Portfolio Management. Each question is accompanied
by the correct answer and a detailed italicised explanation.
Instructions
Answer all 40 questions.
Read each question and any supporting information carefully.
Choose the single best answer for each multiple-choice question.
Complete all short-answer, application/case study, and higher-order thinking
questions.
Show calculations where appropriate.
Review the explanations after completing the examination.
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
A company is valued using the Free Cash Flow to Equity (FCFE) model.
Which discount rate should be used?
A. Weighted Average Cost of Capital (WACC)
B. Cost of Equity
C. Pre-tax Cost of Debt
D. Risk-Free Rate
Answer: B
Explanation: FCFE represents cash flows available only to equity shareholders
and should therefore be discounted using the cost of equity.
Question 2
Which valuation multiple is generally least affected by differences in capital
structure?
A. Price-to-Earnings (P/E)
B. Price-to-Book (P/B)
C. Enterprise Value to EBITDA (EV/EBITDA)
, D. Dividend Yield
Answer: C
Explanation: Enterprise value incorporates both debt and equity financing, making
EV/EBITDA more comparable across firms with different leverage.
Question 3
An analyst expects market interest rates to decline significantly.
Which bond portfolio is likely to experience the greatest price appreciation?
A. Portfolio with the shortest duration
B. Portfolio with floating-rate notes
C. Portfolio with the longest duration
D. Portfolio invested entirely in Treasury bills
Answer: C
Explanation: Long-duration bonds are more sensitive to interest rate changes and
typically gain more value when rates decline.
Question 4
Residual income is positive when:
A. Net income is less than the equity charge.
B. Net income equals depreciation.
C. Net income exceeds the required return on equity.
D. Operating cash flow exceeds investing cash flow.
ADVANCED MOCK EXAM WITH VERIFIED ANSWERS
& DETAILED EXPLANATIONS | CASE-BASED
PRACTICE QUESTIONS | 2026 EDITION
Course Name
Chartered Financial Analyst (CFA) Level II
Level
Professional Certification – Advanced
Short Introduction
This original CFA Level II Practice Exam – Paper 2 is designed to strengthen
advanced analytical and valuation skills required for the CFA Level II
examination. It includes original exam-style questions covering Ethical and
Professional Standards, Quantitative Methods, Economics, Financial Statement
Analysis, Corporate Issuers, Equity Valuation, Fixed Income, Derivatives,
Alternative Investments, and Portfolio Management. Each question is accompanied
by the correct answer and a detailed italicised explanation.
Instructions
Answer all 40 questions.
Read each question and any supporting information carefully.
Choose the single best answer for each multiple-choice question.
Complete all short-answer, application/case study, and higher-order thinking
questions.
Show calculations where appropriate.
Review the explanations after completing the examination.
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
A company is valued using the Free Cash Flow to Equity (FCFE) model.
Which discount rate should be used?
A. Weighted Average Cost of Capital (WACC)
B. Cost of Equity
C. Pre-tax Cost of Debt
D. Risk-Free Rate
Answer: B
Explanation: FCFE represents cash flows available only to equity shareholders
and should therefore be discounted using the cost of equity.
Question 2
Which valuation multiple is generally least affected by differences in capital
structure?
A. Price-to-Earnings (P/E)
B. Price-to-Book (P/B)
C. Enterprise Value to EBITDA (EV/EBITDA)
, D. Dividend Yield
Answer: C
Explanation: Enterprise value incorporates both debt and equity financing, making
EV/EBITDA more comparable across firms with different leverage.
Question 3
An analyst expects market interest rates to decline significantly.
Which bond portfolio is likely to experience the greatest price appreciation?
A. Portfolio with the shortest duration
B. Portfolio with floating-rate notes
C. Portfolio with the longest duration
D. Portfolio invested entirely in Treasury bills
Answer: C
Explanation: Long-duration bonds are more sensitive to interest rate changes and
typically gain more value when rates decline.
Question 4
Residual income is positive when:
A. Net income is less than the equity charge.
B. Net income equals depreciation.
C. Net income exceeds the required return on equity.
D. Operating cash flow exceeds investing cash flow.
