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Thread: Free CFA Level 2 practice question bank for June 2011 exam

  1. #31
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    How about topics other than Qunat

    Hello!
    Will you be posting questions other than quant? It would be good to have one question each every day from now till the exam. Its a tall order but I thought I'd throw it out there.
    Thanks.

  2. #32
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    Q11 Ans A:

    F value = MSR/MSE => 2000/71 = 28.17

    ================================================== =====================================
    Today's Question (Questions and answers provided by Knowledge Varsity)

    Case: Karan Ahuja, CFA is analysing Dharampur Sugar Industries for a possible investment. He has collected the following information about the company’s performance in the year 20X1.

    Cost of Equity = 10%

    Dividend Payout = 60%
    Tax rate = 30%
    EPS = $4

    Assets = $100,000,000; Liability = $75,000,000

    Shares outstanding = 1,000,000

    To start off, Karan Values Dharampur using single stage residual income model.

    After this, Karan wanted to understand the valuation implication of using a 2-stage valuation model. He projects that Dharampur’s ROE will be 17.1% for the next 3 years. After 3 years the stock is expected to trade at a P/B multiple of 1.3.


    Q12. Karan notes that the balance sheet has goodwill due to the acquisition done by Dharampur some years back. The value of the goodwill comes to $2 per share. Karan believes that this goodwill is overstated as the company would not have taken the impairment charge. Which of the following is most likely effect of the presence of goodwill on the valuation?

    A. Karan’s valuation is overstated
    B. Karan’s valuation is understated
    C. There is no impact on valuation

    ================================================== =====================================

  3. #33
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    Q.12 ans C

  4. #34
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    Q12 Ans A:

    Since the goodwill is overstated, the resulting book value is overstated, since we have used book value in our valuation, the valuation is overstated.


    ================================================== =====================================
    Today's Question (Questions and answers provided by Knowledge Varsity)

    This question uses the same case as given in Q.12.

    Q13. Assuming that the clean surplus relationship is not violated, which of the following is most likely the projected residual income in year 20X1.

    A. $2.34

    B. $1.66
    C. $1.5


    ================================================== =====================================

  5. #35
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    Q 13. Ans C.

    Residual income = net income - cost of equity x equity value
    = 4000000 - (0.10) * 25000000= 4000000- 2500000 = 1500000

    On a per share basis = 1500000/1000000 = $ 1.5 or answer C.

  6. #36
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    Q13 Ans B:

    Ending Book Value = 25,000,000/1,000,000 = $25
    We need to find out the beginning book value
    Dividend = 0.6 * $4 = $2.4

    BV end = BV beginning + EPS – Dividend

    BV beginning = $25 - $4 + $2.4 = $23.4
    Equity Charge = BV Beginning * Cost of Equity = $23.4 * 0.1 = $2.34
    Residual Income = $4 - $2.34 = $1.66


    ================================================== =====================================
    Today's Question (Questions and answers provided by Knowledge Varsity)

    Q14. Assuming that the long run return on equity (ROE) is expected to be 13%, which of the following is most likely to be the per share valuation of Dharampur? Assuming clean surplus relationship holds and valuation is done using single stage residual income model.

    A. $31.91
    B. $38.025
    C. $53.31

    ================================================== =====================================

  7. #37
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    Thank you for the explanation for Q12. However for Q13 none of the answers that I get as value per share match any of the choices listed.

    The answer I get is $38.02.

    Please verify or explain as the case maybe.

  8. #38
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    Q14 Ans C:

    Like the previous case here also we need to find out the beginning book value, which turns out to be $23.4.
    The sustainable growth rate = ROE * RR = 13 % * 0.4 = 5.2%

    Value = B0 + (ROE – r)/(r-g) * B0 => 23.4 + (0.13 -0.1)/(0.1 – 0.052) * 23.4 = 23.4+14.625 = 38.025


    ================================================== =====================================
    Today's Question (Questions and answers provided by Knowledge Varsity)


    Q15. Using the single stage model, find the implied growth rate if Dhampur’s stock is trading at $60

    A. 8.08%
    B. 6.5%
    C. 9%

    ================================================== =====================================

  9. #39
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    For question 14, the explanation say the retention ratio is 60%.

    However the vignette shows a payout ratio of 60% which would make retention ratio at 40%.

    Please explain.

  10. #40
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    Quote Originally Posted by ashish24 View Post
    For question 14, the explanation say the retention ratio is 60%.

    However the vignette shows a payout ratio of 60% which would make retention ratio at 40%.

    Please explain.
    Even I was thinking that...good analysis Ashish!

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