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

1. Again for this question based on my calculations I get an answer of 8.08% as the implied growth rate. None of the choices match my answer.

2. Q15 Ans A:

We will be using the single stage formula and replace our valuation with the market price and the find out the growth rate

Price = B0 + (ROE – r)/(r-g) * B0
60 = 23.4 + {(0.13 – 0.1) /(0.1 – g) }*23.4
(60 – 23.4) ={ (0.03)/(0.1-g)}*23.4
g = 8.08%

Best approach in the exam would be to take an answer option and plug into the formula, start with the middle value. If the price from the middle value is more than the actual price then we have taken higher growth rate, so then choose the lower option as the answer.

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

Q16. Karan is concerned that the valuation he has obtained will get impacted by certain accounting policies of Dharampur. Which of the following will impact his valuation the most?

A) Use of LIFO inventory method
B) Presence of operating lease
C) Presence of Patents in the balance sheet

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3. Again we are messing with basic math. How does 0.13-0.10 = 0.02 and not 0.03. With 0.03 in the numberator we end up getting 8.08% as the growth rate.

I would appreciate some clarification on two straight computational errors in consecutive questions.

4. Originally Posted by ashish24
Again we are messing with basic math. How does 0.13-0.10 = 0.02 and not 0.03. With 0.03 in the numberator we end up getting 8.08% as the growth rate.

I would appreciate some clarification on two straight computational errors in consecutive questions.
Originally Posted by ratankv
Thanks to all the members for participating in the Forum. I believe that these questions would be useful for your preparation.
The correct answer to the question No - 3 is option C that is 4216 million rupees.
The question is not a difficult question, as it is just plugging the values, here in these type of question the examiner is seeing whether the candidates are alert.
first lets see why A and B are wrong.
A is wrong - If you mistakenly forget to convert the GDP from billions to millions, you will get the first answer
B is wrong - Here the candidates forget that there is negative 180 in the first term, if you dont take that into consideration then your answer will be 4396.
C is correct - Here we reduce 4396 by 180 to get 4216.

The question is easy and that's why many candidates try to save their time by doing the calculation fast, and since the options are those answers which the student will most likely get wrong they do not double check. CFA Institute examination setter know this and they will be putting these dis-tractors in the answer options.

There will be instances where due to delivery pressure we have some error and we will post errata to those in the forum.
I will now be actively taking part in the discussion, please feel free to post on the forum.

Thanks
Ratan Gupta, FRM
Learning Officer
Knowledge Varsity

Hi Ratan,

I am also having similar doubts. Please clarify them.

5. Q16 Ans B:

Presence of operating leases effect both earnings as well as the book value and hence its impact is the most.
LIFO method reports correct COGS, but reported book value is lower, there need to be adjustment in book value, but the impact is not much
Patents can be treated separately than the firm and hence no adjustment is required.

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

Q17. Which of the following is most likely the residual income for year 3?

A. \$1.89
B. \$1.77
C. \$2.67

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6. For Q 17, my answer is A \$1.89.

7. Q17 Ans A:

See the following table to understand the calculation
EPS = ROE(t) * BV(t-1)
Equity Charge = Cost of Equity * BV(t-1)
Ending Book Value = Beg Book value + EPS - Dividend

Items-----------------20X1------------------20X2---------------------20X3

Beginning BV---------------\$23.4---------------------\$25---------------------------\$26.7094
EPS-------------------------\$4-------------------------\$4.2735----------------------\$4.5657
Dividend--------------------\$2.4-----------------------\$2.5641----------------------\$2.739
Ending Book Value--------\$25------------------------\$1.7094----------------------\$28.535
Equity Charge-------------\$2.34----------------------\$2.5--------------------------\$2.671
Residual Income----------\$1.6-----------------------\$1.7735----------------------\$1.8947

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

Q18. Which of the following is most likely the terminal value of Dharampur’s stock in case of 2 stage residual income valuation?

A. \$34.722
B. \$37.096
C. \$28.535

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8. Q18 Ans B:

The terminal value will be 1.3 times the ending book value in year 20X3 as Karan has estimated that the stock will trade at a P/B ratio of 1.3.
Ending book value = \$28.535 (See the table below)
Terminal Value = 1.3 * 28.535 = 37.0955

Items-------------------20X1----------------20X2------------------20X3

Beginning BV---------------\$23.4---------------------\$25---------------------\$26.7094
EPS--------------------------\$4------------------------\$4.2735----------------\$4.5657
Dividend---------------------\$2.4----------------------\$2.5641----------------\$2.739
Ending Book Value----------\$25----------------------\$1.7094----------------\$28.535
Equity Charge---------------\$2.34--------------------\$2.5--------------------\$2.671
Residual Income------------\$1.6---------------------\$1.7735----------------\$1.8947

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

Q19. Which of the following is most likely to be the per share valuation of Dharampur’s stock using 2-stage model?

A) \$45.32
B) \$55.614
C) \$32.21
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9. Originally Posted by ashish24
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%.

We have requested Knowledge Varsity to clarify. They'll get back soon.

- Team DG

10. Dear Ashish,

There is an error in the calculation for Q15 , the correct answer is the one suggested by you.
The answer should be 8.08%.

The calculation should be as follows
Price = B0 + (ROE – r)/(r-g) * B0
60 = 23.4 + {(0.13 – 0.1) /(0.1 – g) }*23.4
(60 – 23.4) ={(0.03)/(0.1-g)}*23.4
g = 8.08%

Incovenience is regretted.
I see this as a good sign from the Forum perspective as the users are able to identify the mistakes.
Thanks a lot for pointing the answers.

We will be doing a thorough check with the answers again.
Thanks
Ratan Gupta, FRM
Knowledge Varsity

Originally Posted by ashish24
Again we are messing with basic math. How does 0.13-0.10 = 0.02 and not 0.03. With 0.03 in the numberator we end up getting 8.08% as the growth rate.

I would appreciate some clarification on two straight computational errors in consecutive questions.

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