CFA LEVEL II EXAM LATEST 2026 UPDATE 100
QUESTIONS AND DETAILED VERIFIED ANSWERS
FROM ACTUAL EXAMS TEST GRADE A+
1. Equity Valuation – Free Cash Flow
An analyst estimates FCFF of $120M, WACC of 10%, and growth of 4%. What is
firm value?
A. $1,200M
B. $1,500M
C. $2,000M
D. $2,400M
Answer: C. $2,000M
Rationale: Value = FCFF / (WACC − g) = 120 / (0.10 − 0.04) = .06 = 2,000.
2. Residual Income Model
Which increases residual income?
A. Higher equity charge
B. Lower net income
C. Higher ROE than cost of equity
D. Lower book value
Answer: C. Higher ROE than cost of equity
Rationale: Residual income = NI − (Equity × cost of equity). Higher ROE boosts RI.
3. DDM Assumption
The Gordon Growth Model assumes:
,A. Variable growth
B. Constant growth forever
C. No dividends
D. Declining growth
Answer: B. Constant growth forever
Rationale: GGM requires perpetual constant growth.
4. P/E Drivers
Higher P/E is associated with:
A. Higher risk
B. Lower growth
C. Higher growth and lower risk
D. Lower payout
Answer: C. Higher growth and lower risk
Rationale: P/E increases with growth and decreases with risk.
5. Currency Translation
Temporal method uses:
A. Current rate for all items
B. Historical rates for monetary items
C. Current rates for monetary items
D. Historical rates for non-monetary items
Answer: D. Historical rates for non-monetary items
Rationale: Temporal method uses historical rates for non-monetary assets.
6. Pension Accounting
An increase in discount rate leads to:
,A. Higher PBO
B. Lower PBO
C. No change
D. Higher service cost
Answer: B. Lower PBO
Rationale: Higher discount rate reduces present value of obligations.
7. Intercorporate Investments
Equity method applies when ownership is:
A. <20%
B. 20–50%
C. >50%
D. 100%
Answer: B. 20–50%
Rationale: Significant influence triggers equity method.
8. Inventory Accounting
FIFO in inflation results in:
A. Higher COGS
B. Lower net income
C. Higher inventory
D. Lower gross margin
Answer: C. Higher inventory
Rationale: Ending inventory reflects recent higher prices.
9. Financial Ratios
Which improves current ratio?
, A. Paying accounts payable
B. Buying inventory on credit
C. Selling inventory for cash
D. Issuing long-term debt
Answer: C. Selling inventory for cash
Rationale: Converts inventory into cash, both current assets.
10. Derivatives – Forward Pricing
Forward price increases with:
A. Lower interest rates
B. Higher carrying costs
C. Lower spot price
D. Lower time
Answer: B. Higher carrying costs
Rationale: Forward price includes cost of carry.
11. Option Greeks
Delta measures:
A. Time decay
B. Price sensitivity
C. Volatility sensitivity
D. Interest sensitivity
Answer: B. Price sensitivity
Rationale: Delta = change in option price per change in underlying.
12. Fixed Income Duration
Higher duration implies:
QUESTIONS AND DETAILED VERIFIED ANSWERS
FROM ACTUAL EXAMS TEST GRADE A+
1. Equity Valuation – Free Cash Flow
An analyst estimates FCFF of $120M, WACC of 10%, and growth of 4%. What is
firm value?
A. $1,200M
B. $1,500M
C. $2,000M
D. $2,400M
Answer: C. $2,000M
Rationale: Value = FCFF / (WACC − g) = 120 / (0.10 − 0.04) = .06 = 2,000.
2. Residual Income Model
Which increases residual income?
A. Higher equity charge
B. Lower net income
C. Higher ROE than cost of equity
D. Lower book value
Answer: C. Higher ROE than cost of equity
Rationale: Residual income = NI − (Equity × cost of equity). Higher ROE boosts RI.
3. DDM Assumption
The Gordon Growth Model assumes:
,A. Variable growth
B. Constant growth forever
C. No dividends
D. Declining growth
Answer: B. Constant growth forever
Rationale: GGM requires perpetual constant growth.
4. P/E Drivers
Higher P/E is associated with:
A. Higher risk
B. Lower growth
C. Higher growth and lower risk
D. Lower payout
Answer: C. Higher growth and lower risk
Rationale: P/E increases with growth and decreases with risk.
5. Currency Translation
Temporal method uses:
A. Current rate for all items
B. Historical rates for monetary items
C. Current rates for monetary items
D. Historical rates for non-monetary items
Answer: D. Historical rates for non-monetary items
Rationale: Temporal method uses historical rates for non-monetary assets.
6. Pension Accounting
An increase in discount rate leads to:
,A. Higher PBO
B. Lower PBO
C. No change
D. Higher service cost
Answer: B. Lower PBO
Rationale: Higher discount rate reduces present value of obligations.
7. Intercorporate Investments
Equity method applies when ownership is:
A. <20%
B. 20–50%
C. >50%
D. 100%
Answer: B. 20–50%
Rationale: Significant influence triggers equity method.
8. Inventory Accounting
FIFO in inflation results in:
A. Higher COGS
B. Lower net income
C. Higher inventory
D. Lower gross margin
Answer: C. Higher inventory
Rationale: Ending inventory reflects recent higher prices.
9. Financial Ratios
Which improves current ratio?
, A. Paying accounts payable
B. Buying inventory on credit
C. Selling inventory for cash
D. Issuing long-term debt
Answer: C. Selling inventory for cash
Rationale: Converts inventory into cash, both current assets.
10. Derivatives – Forward Pricing
Forward price increases with:
A. Lower interest rates
B. Higher carrying costs
C. Lower spot price
D. Lower time
Answer: B. Higher carrying costs
Rationale: Forward price includes cost of carry.
11. Option Greeks
Delta measures:
A. Time decay
B. Price sensitivity
C. Volatility sensitivity
D. Interest sensitivity
Answer: B. Price sensitivity
Rationale: Delta = change in option price per change in underlying.
12. Fixed Income Duration
Higher duration implies:
