CFA Level 2 Exam Questions and
Answers (Graded A+)
FCFF (using EBITDA) - Answer-FCFF = EBIDTA(1-T) + DEP(T) - Finv - Winv
Converting FIFO to LIFO COGS - Answer-FIFO COGS = LIFO COGS - (End LIFO
Reserve - Beg LIFO reserve)
Engle- Granger Test - Answer-Test whether 2 variables are cointegrated. Regress 1
data series against the other and check residuals for unit root.
Steady State of Growth Formula - Answer-growth = Growth Rate TFP/1-(Labor cost in
total factor cost) + labor force growth
Labor productivity growth accounting Equation (Growth Rate in Potential GDP) -
Answer-Growth rate in potential GDP = Long-Term growth rate of labor force + Long-
term growth rate in labor productivity
Neoclassical Model - Answer-Because of diminishing marginal returns to capital, the
only way to sustain growth in potential GDP per capita is through technological change
or growth in total factor productivity. a steady state rate of growth and diminishing
marginal returns, which are tenets of neoclassical growth theory.
Real Interest Rate - Answer-real = Nominal - Expected inflation rate
Period Pension Cost (formula) US GAAP - Answer-Current Service Cost + Interest cost
obligation - Expected Return on Assets + Plus amortization of past service cost +
amortization actuarial gain/losses
Total Periodic Pension Cost - Answer-Net Change in Liability of the plan - Employer
Contributions or Interest Cost + Service Cost - Actual return on investments.
Total value to paid (TVPI) - Answer-DPI + RVPI / Paid in Capital
H-Model - Answer-V0= Do(1+GL) + DoH(gs-gL)/ r- GL
FCFE using FCFF - Answer-FCFE = FCFF -Interest(1-T) + Net Borrowing
Value of Long position in a forward contract - Answer-V = St - Forward Price (1+r)^(T-t)
Synthetic Share (Put-Call Pariy) - Answer-Co=Po + So- X/(1+rf)
Payout ratio - Answer-Payout ratio = 1- b (b= retention ratio)
, Justified leading P/E - Answer-1-b/ r-g
Justified trailing P/E - Answer-1- b (1 + g)/ r-g Where (1-b) = Dividend payout ratio, G is
LT Growth in Dividends
Standard error of estimate - Answer-(Sse/n-2)^1\2 where Sse = Sum of squares
residual
F statistic - Answer-Msr/mse = RSS/k /SSE/n-(k+1)
MSR = mean regression sum of squares
MSE = mean squared error, SSE/(n - k + 1)
RSS = regression sum of squares; the amount of variation in Y explained by the model
SSE = sum of squared error from the regression model
k = the number of regressors in the model
n = the number of observations
Portfolio standard deviation of return - Answer-Port var = var((1- p))/ n +p) p=correlation
Post offer defeneses - Answer-Leveraged recapitalization, green mail
Pre offer defenese - Answer-Supermajority voting provision, poison puts, fair price
amendments, restricted voting rights, poison pills , staggerd board elections
Post merger value of firm - Answer-V= Va + Vt + Synergies - Cash
Hhi merger index - Answer-(% x 100)^2+ (%x 100)^2
Post merger between 1000 and 1800 moderately concentrated interests, change
greater 100 challenge
Forward contract formula - Answer-Fpt- FP(contract size)/ (1+r(days/360)
FX Forward Premium Equation - Answer-Sp/b [(Actual/360)/1+Ib(Acutal/360)](ip-ib)
Triangular Arbitrage Conditions - Answer-1st the bid shown by a dealer in the interbank
market cannot be higher than the current interbank offer, and the offer shown by a
dealer cannot be lower than the current interbank bid. If the bid-offer quotes shown by a
dealer are inconsistent with the interbank market quotes, other market participants will
buy from the cheaper source and sell to the more expensive source.
Answers (Graded A+)
FCFF (using EBITDA) - Answer-FCFF = EBIDTA(1-T) + DEP(T) - Finv - Winv
Converting FIFO to LIFO COGS - Answer-FIFO COGS = LIFO COGS - (End LIFO
Reserve - Beg LIFO reserve)
Engle- Granger Test - Answer-Test whether 2 variables are cointegrated. Regress 1
data series against the other and check residuals for unit root.
Steady State of Growth Formula - Answer-growth = Growth Rate TFP/1-(Labor cost in
total factor cost) + labor force growth
Labor productivity growth accounting Equation (Growth Rate in Potential GDP) -
Answer-Growth rate in potential GDP = Long-Term growth rate of labor force + Long-
term growth rate in labor productivity
Neoclassical Model - Answer-Because of diminishing marginal returns to capital, the
only way to sustain growth in potential GDP per capita is through technological change
or growth in total factor productivity. a steady state rate of growth and diminishing
marginal returns, which are tenets of neoclassical growth theory.
Real Interest Rate - Answer-real = Nominal - Expected inflation rate
Period Pension Cost (formula) US GAAP - Answer-Current Service Cost + Interest cost
obligation - Expected Return on Assets + Plus amortization of past service cost +
amortization actuarial gain/losses
Total Periodic Pension Cost - Answer-Net Change in Liability of the plan - Employer
Contributions or Interest Cost + Service Cost - Actual return on investments.
Total value to paid (TVPI) - Answer-DPI + RVPI / Paid in Capital
H-Model - Answer-V0= Do(1+GL) + DoH(gs-gL)/ r- GL
FCFE using FCFF - Answer-FCFE = FCFF -Interest(1-T) + Net Borrowing
Value of Long position in a forward contract - Answer-V = St - Forward Price (1+r)^(T-t)
Synthetic Share (Put-Call Pariy) - Answer-Co=Po + So- X/(1+rf)
Payout ratio - Answer-Payout ratio = 1- b (b= retention ratio)
, Justified leading P/E - Answer-1-b/ r-g
Justified trailing P/E - Answer-1- b (1 + g)/ r-g Where (1-b) = Dividend payout ratio, G is
LT Growth in Dividends
Standard error of estimate - Answer-(Sse/n-2)^1\2 where Sse = Sum of squares
residual
F statistic - Answer-Msr/mse = RSS/k /SSE/n-(k+1)
MSR = mean regression sum of squares
MSE = mean squared error, SSE/(n - k + 1)
RSS = regression sum of squares; the amount of variation in Y explained by the model
SSE = sum of squared error from the regression model
k = the number of regressors in the model
n = the number of observations
Portfolio standard deviation of return - Answer-Port var = var((1- p))/ n +p) p=correlation
Post offer defeneses - Answer-Leveraged recapitalization, green mail
Pre offer defenese - Answer-Supermajority voting provision, poison puts, fair price
amendments, restricted voting rights, poison pills , staggerd board elections
Post merger value of firm - Answer-V= Va + Vt + Synergies - Cash
Hhi merger index - Answer-(% x 100)^2+ (%x 100)^2
Post merger between 1000 and 1800 moderately concentrated interests, change
greater 100 challenge
Forward contract formula - Answer-Fpt- FP(contract size)/ (1+r(days/360)
FX Forward Premium Equation - Answer-Sp/b [(Actual/360)/1+Ib(Acutal/360)](ip-ib)
Triangular Arbitrage Conditions - Answer-1st the bid shown by a dealer in the interbank
market cannot be higher than the current interbank offer, and the offer shown by a
dealer cannot be lower than the current interbank bid. If the bid-offer quotes shown by a
dealer are inconsistent with the interbank market quotes, other market participants will
buy from the cheaper source and sell to the more expensive source.
