CFA Level II practice questions
Start with the free questions below, then check the reasoning. For full Level II preparation, work vignette-based sets that require you to select facts and valuation models together.
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| Scope | This page | Official exam |
|---|---|---|
| Question format | Selected teaching questions with explanations | 22 vignette-based item sets / 88 MCQs |
Question format
- This page
- Selected teaching questions with explanations
- Official exam
- 22 vignette-based item sets / 88 MCQs
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Your 10-question sample
A 10-question learning sample arranged 4 + 4 + 2 across three cases. The final case is a two-question excerpt, not a complete official-format item set. This is not a full mock.
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- Question 1 of 10Financial Statement AnalysisMultiple choice
Case facts
Asteria Group reports under IFRS. At the beginning of the year, it paid $120 million for 30% of Northfield Ltd. Asteria can exercise significant influence over Northfield. During the year, Northfield earned $30 million and paid $10 million in dividends.
Asteria also acquired 80% of Lumen Co. for $480 million. At acquisition, the fair value of Lumen's identifiable net assets was $500 million and the fair value of the non-controlling interest was $110 million.
Asteria's defined-benefit plan reported current service cost of $5 million, net interest expense of $2 million, and a $3 million remeasurement gain. A trading debt security bought for $100 million had a year-end fair value of $106 million.
The year-end carrying amount of Asteria's investment in Northfield is closest to:
Answer and explanations
Asteria owns 30%, has significant influence, and Northfield reports $30 million of income and $10 million of dividends. Significant influence supports the equity method. Asteria recognizes 30% of Northfield's $30 million income, or $9 million, and reduces the investment for 30% of the $10 million dividend, or $3 million. The ending carrying amount is $120 million plus $9 million minus $3 million, which equals $126 million.
- A: $120m ignores the net share of earnings less dividends.
- B - correct: $120m + $9m - $3m = $126m.
- C: $129m includes earnings but ignores dividends.
- Question 2 of 10Financial Statement AnalysisMultiple choice
Case facts
Asteria Group reports under IFRS. At the beginning of the year, it paid $120 million for 30% of Northfield Ltd. Asteria can exercise significant influence over Northfield. During the year, Northfield earned $30 million and paid $10 million in dividends.
Asteria also acquired 80% of Lumen Co. for $480 million. At acquisition, the fair value of Lumen's identifiable net assets was $500 million and the fair value of the non-controlling interest was $110 million.
Asteria's defined-benefit plan reported current service cost of $5 million, net interest expense of $2 million, and a $3 million remeasurement gain. A trading debt security bought for $100 million had a year-end fair value of $106 million.
Goodwill recognized in the Lumen acquisition is closest to:
Answer and explanations
Consideration is $480 million, fair-value non-controlling interest is $110 million, and identifiable net assets are $500 million. Using the full-goodwill data supplied, goodwill equals consideration transferred plus the fair value of the non-controlling interest minus identifiable net assets. The calculation is $480 million plus $110 million minus $500 million, which produces $90 million of goodwill.
- A: $80m does not use the supplied fair value of the non-controlling interest.
- B - correct: $480m + $110m - $500m = $90m.
- C: $110m is the non-controlling interest, not goodwill.
- Question 3 of 10Financial Statement AnalysisMultiple choice
Case facts
Asteria Group reports under IFRS. At the beginning of the year, it paid $120 million for 30% of Northfield Ltd. Asteria can exercise significant influence over Northfield. During the year, Northfield earned $30 million and paid $10 million in dividends.
Asteria also acquired 80% of Lumen Co. for $480 million. At acquisition, the fair value of Lumen's identifiable net assets was $500 million and the fair value of the non-controlling interest was $110 million.
Asteria's defined-benefit plan reported current service cost of $5 million, net interest expense of $2 million, and a $3 million remeasurement gain. A trading debt security bought for $100 million had a year-end fair value of $106 million.
The defined-benefit pension expense reported in profit or loss is closest to:
Answer and explanations
Current service cost is $5 million, net interest expense is $2 million, and the $3 million remeasurement is a gain. Under the supplied IFRS presentation, current service cost and net interest are recognized in profit or loss, while the remeasurement gain is recognized in other comprehensive income. Profit-or-loss pension expense is therefore $5 million plus $2 million, or $7 million.
- A: $2m includes net interest alone.
- B: $5m includes service cost alone.
- C - correct: $5m service cost + $2m interest = $7m; remeasurement goes to OCI.
- Question 4 of 10Financial Statement AnalysisMultiple choice
Case facts
Asteria Group reports under IFRS. At the beginning of the year, it paid $120 million for 30% of Northfield Ltd. Asteria can exercise significant influence over Northfield. During the year, Northfield earned $30 million and paid $10 million in dividends.
Asteria also acquired 80% of Lumen Co. for $480 million. At acquisition, the fair value of Lumen's identifiable net assets was $500 million and the fair value of the non-controlling interest was $110 million.
Asteria's defined-benefit plan reported current service cost of $5 million, net interest expense of $2 million, and a $3 million remeasurement gain. A trading debt security bought for $100 million had a year-end fair value of $106 million.
The trading debt security most likely increases current-year profit before tax by:
Answer and explanations
The security is identified as trading, cost $100 million, and has a year-end fair value of $106 million. A trading security measured at fair value through profit or loss recognizes its unrealized fair-value change in current profit. The security increased from $100 million to $106 million, so the vignette supports a $6 million increase in profit before tax.
- A: Trading classification does not defer this fair-value gain.
- B: $3m is not the change between the supplied values.
- C - correct: $106m - $100m = $6m recognized in profit.
- Question 5 of 10EquitiesMultiple choice
Case facts
An analyst forecasts Beacon Medical's next-year free cash flow to the firm at $75 million. The analyst uses a 9% weighted average cost of capital and a 3% perpetual growth rate. Beacon has $250 million of debt, no excess cash, and 50 million shares outstanding.
Beacon's beginning book value per share is $30. Expected return on equity is 14%, the required return on equity is 10%, expected long-run growth is 4%, and forecast earnings per share are $4.20.
For a separate free-cash-flow-to-equity estimate, the analyst forecasts net income of $90 million, depreciation of $20 million, capital expenditures of $35 million, a $5 million increase in working capital, and $10 million of net borrowing.
Beacon's estimated equity value per share from the constant-growth FCFF model is closest to:
Answer and explanations
Next-year FCFF is $75 million, WACC is 9%, growth is 3%, debt is $250 million, and 50 million shares are outstanding. Enterprise value is next-year FCFF divided by WACC minus growth: $75 million divided by 6%, or $1,250 million. Subtracting $250 million of debt gives $1,000 million of equity value. Dividing by 50 million shares produces $20 per share.
- A: $15 understates equity value after the debt deduction.
- B - correct: ($75m / 0.06 - $250m) / 50m = $20.
- C: $25 is enterprise value per share before deducting debt.
- Question 6 of 10EquitiesMultiple choice
Case facts
An analyst forecasts Beacon Medical's next-year free cash flow to the firm at $75 million. The analyst uses a 9% weighted average cost of capital and a 3% perpetual growth rate. Beacon has $250 million of debt, no excess cash, and 50 million shares outstanding.
Beacon's beginning book value per share is $30. Expected return on equity is 14%, the required return on equity is 10%, expected long-run growth is 4%, and forecast earnings per share are $4.20.
For a separate free-cash-flow-to-equity estimate, the analyst forecasts net income of $90 million, depreciation of $20 million, capital expenditures of $35 million, a $5 million increase in working capital, and $10 million of net borrowing.
Using beginning book value B0, Beacon's justified price-to-book ratio P0/B0 is closest to:
Answer and explanations
Expected ROE is 14%, required return on equity is 10%, and expected growth is 4%. The justified price-to-book multiple is expected ROE minus growth divided by the required return minus growth. Substituting the vignette inputs gives 10% divided by 6%, or approximately 1.67. Book value per share is not needed for this multiple.
- A: 1.50 does not apply the supplied ROE, growth and required return.
- B - correct: (14% - 4%) / (10% - 4%) = 1.67.
- C: 2.33 divides ROE by the return-growth spread without subtracting growth from ROE.
- Question 7 of 10EquitiesMultiple choice
Case facts
An analyst forecasts Beacon Medical's next-year free cash flow to the firm at $75 million. The analyst uses a 9% weighted average cost of capital and a 3% perpetual growth rate. Beacon has $250 million of debt, no excess cash, and 50 million shares outstanding.
Beacon's beginning book value per share is $30. Expected return on equity is 14%, the required return on equity is 10%, expected long-run growth is 4%, and forecast earnings per share are $4.20.
For a separate free-cash-flow-to-equity estimate, the analyst forecasts net income of $90 million, depreciation of $20 million, capital expenditures of $35 million, a $5 million increase in working capital, and $10 million of net borrowing.
Forecast residual income per share for Beacon is closest to:
Answer and explanations
Forecast EPS is $4.20, beginning book value per share is $30, and the required return on equity is 10%. Residual income equals earnings minus the equity charge on beginning book value. The equity charge is 10% of $30, or $3.00 per share. Subtracting that charge from forecast EPS of $4.20 produces residual income of $1.20 per share.
- A: $0.90 is not EPS less the charge on beginning book value.
- B - correct: $4.20 - 10% x $30 = $1.20.
- C: $3.00 is the equity charge, not residual income.
- Question 8 of 10EquitiesMultiple choice
Case facts
An analyst forecasts Beacon Medical's next-year free cash flow to the firm at $75 million. The analyst uses a 9% weighted average cost of capital and a 3% perpetual growth rate. Beacon has $250 million of debt, no excess cash, and 50 million shares outstanding.
Beacon's beginning book value per share is $30. Expected return on equity is 14%, the required return on equity is 10%, expected long-run growth is 4%, and forecast earnings per share are $4.20.
For a separate free-cash-flow-to-equity estimate, the analyst forecasts net income of $90 million, depreciation of $20 million, capital expenditures of $35 million, a $5 million increase in working capital, and $10 million of net borrowing.
Beacon's forecast free cash flow to equity is closest to:
Answer and explanations
Net income is $90 million, depreciation is $20 million, capital expenditures are $35 million, working capital rises $5 million, and net borrowing is $10 million. FCFE starts with net income, adds non-cash depreciation, subtracts capital expenditures and the working-capital investment, and adds net borrowing. The calculation is $90 million plus $20 million minus $35 million minus $5 million plus $10 million, or $80 million.
- A: $70m omits the $10m of net borrowing.
- B - correct: $90m + $20m - $35m - $5m + $10m = $80m.
- C: $90m is net income before the cash-flow adjustments.
- Question 9 of 10Fixed IncomeMultiple choice
Case facts
Cedar Ridge observes an annualized one-year spot rate of 4.0% and a two-year spot rate of 5.0%. Rates use annual compounding.
An option-free bond in the desk portfolio has modified duration of 5.2. The desk is evaluating a 30-basis-point parallel increase in yield. A separate corporate bond trades at a 180-basis-point spread over a government yield of 4.2%.
The desk also reviews a $10 million loan exposure with a one-year probability of default of 2% and a loss given default of 40%.
The one-year forward rate beginning one year from today is closest to:
Answer and explanations
The one-year spot rate is 4.0%, the two-year spot rate is 5.0%, and both use annual compounding. No-arbitrage links the rates through (1.05 squared) divided by 1.04. Subtracting one gives approximately 6.01%, so the one-year forward rate beginning in one year is closest to 6.0%. The 5.0% input is the two-year spot rate, not the forward rate.
- A: 5% is the two-year spot rate.
- B - correct: (1.05 x 1.05) / 1.04 - 1 is approximately 6.01%.
- C: 6.5% is inconsistent with the supplied annual spot rates.
- Question 10 of 10Fixed IncomeMultiple choice
Case facts
Cedar Ridge observes an annualized one-year spot rate of 4.0% and a two-year spot rate of 5.0%. Rates use annual compounding.
An option-free bond in the desk portfolio has modified duration of 5.2. The desk is evaluating a 30-basis-point parallel increase in yield. A separate corporate bond trades at a 180-basis-point spread over a government yield of 4.2%.
The desk also reviews a $10 million loan exposure with a one-year probability of default of 2% and a loss given default of 40%.
Using modified duration only, the bond's approximate percentage price change is closest to:
Answer and explanations
Modified duration is 5.2 and the yield change is an increase of 30 basis points, or 0.0030. The duration approximation is negative modified duration multiplied by the yield change. Multiplying negative 5.2 by 0.0030 gives negative 0.0156, or an approximate 1.56% price decline. The negative sign reflects the inverse price-yield relation.
- A - correct: -5.2 x 0.003 = -1.56%.
- B: -0.30% ignores duration.
- C: The positive sign contradicts the price effect of a yield increase.
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Try 24 questions across 6 cases
Read each case, attempt its four questions, then check the explanations. These original teaching cases cover selected skills and are not a full mock or an official item set.
4 questions per case
Case 1 · Four questions
Equity valuation and model assumptions
A fictional mature company is expected to pay a dividend of USD 3.00 per share one year from today. Dividends are assumed to grow at a constant 3% annually forever. The required equity return is 9%, and the current share price is USD 48. Assume the constant-growth dividend model is appropriate unless a question changes an assumption.
Today
USD 48
Observed share price
In 1 year
USD 3
Next expected dividend
After year 1
3% growth
Required return: 9%
Equity valuation: select the inputs
Using the constant-growth dividend model, the estimated value per share is closest to:
Equity valuation: interpret the market price
At the market price of USD 48, the return implied by the same dividend and growth assumptions is closest to:
Equity valuation: change one assumption
If the required return increases to 10% and the other assumptions stay unchanged, estimated value is closest to:
Equity valuation: check model fit
New evidence suggests dividends will grow rapidly for three years before stabilizing. The most appropriate next step is to:
Case 2 · Four questions
Spot rates and bond value
A fictional default-free bond pays USD 6 in one year and USD 106 in two years, including principal. Annual effective spot rates are 4% for one year and 5% for two years. Use annual compounding. There are no embedded options. Question four changes the credit-risk assumption.
Today
Value to find
Discount each payment
In 1 year
USD 6
1-year spot rate: 4%
In 2 years
USD 106
2-year spot rate: 5%
Fixed income: discount each cash flow
The value of the bond is closest to:
Fixed income: identify a component
The present value of the USD 100 principal payment alone is closest to:
Fixed income: implied forward rate
The implied one-year forward rate beginning one year from now is closest to:
Fixed income: interpret a changed assumption
If the same promised cash flows are now subject to credit risk and investors require a positive spread over both spot rates, the value will:
Case 3 · Four questions
Cash flow to the firm or to equity?
A fictional company reports net income of USD 30 million, interest expense of USD 10 million, depreciation of USD 12 million, capital expenditure of USD 20 million, and an increase in operating working capital of USD 5 million. The tax rate is 25%, interest is deductible, and net borrowing is USD 3 million. Assume no other adjustments are needed.
Equity valuation: FCFF
Free cash flow to the firm is closest to:
Equity valuation: FCFE
Free cash flow to equity is closest to:
Equity valuation: match rate to cash flow
Which pairing is appropriate for an internally consistent valuation?
Equity valuation: working-capital sensitivity
If the increase in working capital is USD 1 million instead of USD 5 million and all other inputs stay unchanged, FCFF will:
Case 4 · Four questions
Regression evidence and currency returns
An analyst fits a return model using historical monthly observations: predicted asset return (%) = 0.5 + 1.2 × market return (%). The estimated slope has a two-sided p-value of 0.03, and the analyst uses a 5% significance level to test a zero slope. Separately, a USD-based investor earns 8% on a EUR investment while EUR rises 5% against USD over the same period. Ignore costs and taxes. Historical association alone is not evidence of causation.
Quantitative methods: regression prediction
If the market return is 2%, the model’s predicted asset return is:
Quantitative methods: hypothesis testing
Using the stated test, the most appropriate conclusion is to:
Economics: return in the investor’s currency
The USD investor’s return on the EUR investment is:
Quantitative methods: model limitations
A major change in the company’s business makes the historical sample less representative. The analyst should most appropriately:
Case 5 · Four questions
Private-fund multiples and a portfolio decision
A fictional private fund has USD 100 million of cumulative paid-in capital, USD 30 million of cumulative distributions and USD 90 million of remaining net asset value. All values are at the same measurement date. Separately, an allocator considers replacing ten percentage points of a portfolio’s public-equity allocation, expected to return 7% annually, with a private-fund allocation expected to return 9% annually. The proposed fund has a seven-year lockup. Ignore fees and taxes for the return arithmetic; do not assume the expected returns are certain.
Alternative investments: DPI
The private fund’s distributed-to-paid-in capital multiple (DPI) is:
Alternative investments: TVPI
The total-value-to-paid-in capital multiple (TVPI) is:
Portfolio management: expected-return contribution
Holding other weights and assumptions constant, the proposed replacement increases expected portfolio return by:
Portfolio management: liquidity constraint
If the replaced assets are reserved for a payment due in one year and the investor has no other liquid funding, the strongest objection is:
Case 6 · Four questions
Research judgment and professional duties
A fictional analyst who is a CFA Program candidate hears an issuer’s CFO privately disclose a large unannounced loss that is likely to affect its share price. The analyst is also preparing a report using an external research firm’s chart. Separately, an issuer offers the analyst an expensive holiday conditional on publishing favorable coverage. Assume the loss is material nonpublic information, the chart is another firm’s original work and no permission to omit attribution has been given.
Ethics: material nonpublic information
The most appropriate action after receiving the loss information is to:
Ethics: attribution
When using the external chart in the report, the analyst should:
Ethics: independence and objectivity
The most appropriate response to the conditional holiday offer is to:
Ethics: distinguishing facts from opinions
For a valuation estimate in the report, the analyst should most appropriately:
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CFA Level II: 20 practice MCQs
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Use a different question after a delay. Track whether the reasoning transfers instead of memorizing the answer letter.
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| If you... | Check this | Next attempt |
|---|---|---|
| Chose the right answer by guessing | Can you identify the rule and the deciding case fact? | Explain the answer without relying on the letter or remembered number. |
| Selected the wrong input | Did the date, unit, exhibit or cash-flow definition match the question? | Label each input before calculating. |
| Used the wrong model | Which assumption makes the chosen method appropriate? | Change one assumption and decide whether the method still fits. |
| Made an arithmetic error | Were the formula, signs and periods correct before calculator entry? | Estimate direction and approximate size, then recalculate. |
Chose the right answer by guessing
- Check this
- Can you identify the rule and the deciding case fact?
- Next attempt
- Explain the answer without relying on the letter or remembered number.
Selected the wrong input
- Check this
- Did the date, unit, exhibit or cash-flow definition match the question?
- Next attempt
- Label each input before calculating.
Used the wrong model
- Check this
- Which assumption makes the chosen method appropriate?
- Next attempt
- Change one assumption and decide whether the method still fits.
Made an arithmetic error
- Check this
- Were the formula, signs and periods correct before calculator entry?
- Next attempt
- Estimate direction and approximate size, then recalculate.
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CFA Level II: 20 practice MCQs
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